**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| ý                                                                                                                                                                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                  |       |                                                                                                      |
| **For the quarterly period ended March 31, 2006**                                                                                                                                     |
|                                                                                                                                                                                  |       |                                                                                                      |
| **OR**                                                                                                                                                                                |
|                                                                                                                                                                                  |       |                                                                                                      |
| o                                                                                                                                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                  | ** ** | ** **                                                                                                |
| **For the transition period  from            to            ** |

 

**Commission file number 000-31511**

 

**@Road, Inc.**

 (Exact name of registrant asspecified in its charter)

 

| **Delaware**                    | ** ** | **94-3209170**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**47071 Bayside Parkway**

**Fremont, CA 94538**

(Address of principal executive offices, including zip code)

 

**510-668-1638**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

 
| Large  Accelerated Filer o |   | Accelerated Filer ý |   | Non-Accelerated Filer o |
|----------------------------|--------|--------------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o    No    ý

 

As of May 1, 2006 therewere 61,561,637 shares of the registrant’s Common Stock outstanding.

 

 

----

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                                    | 1  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|         | Item 1.  Financial Statements.                                                                                                                                                          | 1  |
|         | Condensed Consolidated Balance Sheets as of March 31, 2006 and  December 31, 2005.                                                                                                      | 1  |
|         | Condensed Consolidated Statements of Operations for the three months  ended March 31, 2006 and 2005 (As Restated).                                                                           | 2  |
|         | Condensed Consolidated Statements of Stockholders’ Equity for the  three months ended March 31, 2006 and 2005 (As Restated) and the nine months  ended December 31, 2005 (As Restated). | 3  |
|         | Condensed Consolidated Statements of Cash Flows for the three months  ended March 31, 2006 and 2005 (As Restated).                                                                           | 4  |
|         | Notes to Condensed Consolidated Financial Statements.                                                                                                                                        | 5  |
|         | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations.                                                                                    | 21 |
|         | Item 3. Quantitative and Qualitative  Disclosures About Market Risk.                                                                                                                    | 40 |
|         | Item 4. Controls and Procedures.                                                                                                                                                        | 41 |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                                        | 43 |
|         | Item 1. Legal Proceedings.                                                                                                                                                              | 43 |
|         | Item 1A. Risk Factors.                                                                                                                                                                  | 43 |
|         | Item 6. Exhibits.                                                                                                                                                                       | 43 |

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**@Road, Inc.**

**CondensedConsolidated Balance Sheets**

**(In thousands, except per share data)(unaudited)**

 
| ** **                                                                                                                                                                                        | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                        |       |                |       |                   |       |
| Current  assets:                                                                                                                                                                                  |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                   | 24,177     |                   | $          | 25,773 |   |
| Short-term investments                                                                                                                                                                            |       | 75,975              |       | 77,643                 |       |
| Accounts receivable, net                                                                                                                                                                          |       | 10,798              |       | 12,475                 |       |
| Inventories                                                                                                                                                                                       |       | 10,341              |       | 6,087                  |       |
| Deferred product costs                                                                                                                                                                            |       | 17,468              |       | 16,187                 |       |
| Deferred tax assets                                                                                                                                                                               |       | 1,488               |       | 1,448                  |       |
| Prepaid expenses and other                                                                                                                                                                        |       | 1,691               |       | 2,566                  |       |
| Total current assets                                                                                                                                                                              |       | 141,938             |       | 142,179                |       |
| Property and equipment, net                                                                                                                                                                       |       | 6,185               |       | 6,195                  |       |
| Deferred product costs                                                                                                                                                                            |       | 17,425              |       | 16,995                 |       |
| Deferred tax assets                                                                                                                                                                               |       | 40,771              |       | 40,531                 |       |
| Goodwill                                                                                                                                                                                          |       | 13,341              |       | 13,341                 |       |
| Intangible assets, net                                                                                                                                                                            |       | 26,323              |       | 27,333                 |       |
| Other non-current assets                                                                                                                                                                          |       | 721                 |       | 400                    |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Total assets                                                                                                                                                                                      |       | $                   | 246,704    |                   | $          | 246,974 |   |
|                                                                                                                                                                                              |       |                |       |                   |       |
| **LIABILITIES, REDEEMABLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current  liabilities:                                                                                                                                                                             |       |                |       |                   |       |
| Accounts payable                                                                                                                                                                                  |       | $                   | 9,501      |                   | $          | 6,653 |   |
| Accrued liabilities                                                                                                                                                                               |       | 7,492               |       | 8,751                  |       |
| Deferred revenue and customer deposits                                                                                                                                                            |       | 14,451              |       | 15,495                 |       |
| Derivative instrument                                                                                                                                                                             |       | 4,065               |       | 1,457                  |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Total current liabilities                                                                                                                                                                         |       | 35,509              |       | 32,356                 |       |
| Deferred  revenue                                                                                                                                                                                 |       | 17,188              |       | 17,333                 |       |
| Deferred tax  liabilities                                                                                                                                                                         |       | —              |       | 323                    |       |
| Derivative  instrument                                                                                                                                                                            |       | —              |       | 1,457                  |       |
| Other  long-term liabilities                                                                                                                                                                      |       | 428                 |       | 461                    |       |
| Total liabilities                                                                                                                                                                                 |       | 53,125              |       | 51,930                 |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Commitments  and contingencies (Note 11)                                                                                                                                                          |       |                |       |                   |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Preferred stock, $0.001 par value, 10,000  shares authorized, 98 shares designated as redeemable preferred stock, shares  issued and outstanding: 78 at March 31, 2006 and December 31, 2005 |       | 8,308               |       | 8,184                  |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                       |       |                |       |                   |       |
| Common stock, $0.0001 par value, 250,000  shares authorized, shares issued and outstanding: 61,233 at March 31, 2006  and 61,154 at December 31, 2005                                        |       | 266,346             |       | 265,347                |       |
| Note  receivable from stockholder                                                                                                                                                                 |       | (6                  | )          | (7                     | )          |
| Accumulated  other comprehensive loss                                                                                                                                                             |       | (99                 | )          | (78                    | )          |
| Accumulated  deficit                                                                                                                                                                              |       | (80,970             | )          | (78,402                | )          |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Total  stockholders’ equity                                                                                                                                                                  |       | 185,271             |       | 186,860                |       |
|                                                                                                                                                                                              |       |                |       |                   |       |
| Total  liabilities, redeemable preferred stock and stockholders’ equity                                                                                                                      |       | $                   | 246,704    |                   | $          | 246,974 |   |

 

See notes to condensed consolidated financial statements.

 

1

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Operations**

**(In thousands, except per share data)(unaudited)**

 
| ** **                                                                    | ** **   | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|--------------|-----------------------------------|------------|
| ** **                                                                    | ** **   | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                                    | *** *** | ** **                        | ** ** | **As Restated  (See Note 1)** | ** ** |
| Revenues:                                                                     | * *     | * *                          |       |   |   |
| Hosted                                                                        |         | $                                 | 20,963     |   | $ | 19,490 |   |
| Licensed                                                                      |         | 3,782                             |       | 502 |   |
|                                                                          |         |                              |       |   |   |
| Total revenues                                                                |         | 24,745                            |       | 19,992 |   |
|                                                                          |         |                              |       |   |   |
| Costs and  expenses:                                                          |         |                              |       |   |   |
| Cost of hosted revenue (excluding  intangibles amortization included below)   |         | 11,002                            |       | 9,524 |   |
| Cost of licensed revenue (excluding  intangibles amortization included below) |         | 1,230                             |       | 700 |   |
| Intangibles amortization                                                      |         | 1,010                             |       | 457 |   |
| Sales and marketing                                                           |         | 5,918                             |       | 4,647 |   |
| Research and development                                                      |         | 3,669                             |       | 2,575 |   |
| General and administrative                                                    |         | 4,942                             |       | 4,447 |   |
| In-process research and development                                           |         | —                            |       | 5,640 |   |
|                                                                          |         |                              |       |   |   |
| Total costs and expenses                                                      |         | 27,771                            |       | 27,990 |   |
|                                                                          |         |                              |       |   |   |
| Loss from  operations                                                         |         | (3,026                            | )          | (7,998 | ) |
|                                                                          |         |                              |       |   |   |
| Other expense,  net:                                                          |         |                              |       |   |   |
| Interest income, net                                                          |         | 1,036                             |       | 618 |   |
| Change in derivative instrument liability                                     |         | (1,151                            | )          | (741 | ) |
| Other expense, net                                                            |         | (17                               | )          | 2 |   |
|                                                                          |         |                              |       |   |   |
| Total other expense, net                                                      |         | (132                              | )          | (121 | ) |
|                                                                          |         |                              |       |   |   |
| Net loss  before income taxes                                                 |         | (3,158                            | )          | (8,119 | ) |
| Benefit from  income taxes                                                    |         | 590                               |       | — |   |
| Net loss                                                                      |         | (2,568                            | )          | (8,119 | ) |
| Preferred  stock dividends                                                    |         | (124                              | )          | (57 | ) |
|                                                                          |         |                              |       |   |   |
| Net loss  attributable to common stockholders                                 |         | $                                 | (2,692     | ) | $ | (8,176 | ) |
|                                                                          |         |                              |       |   |   |
| Net loss per  share:                                                          |         |                              |       |   |   |
| Basic                                                                         |         | $                                 | (0.04      | ) | $ | (0.14 | ) |
|                                                                          |         |                              |       |   |   |
| Diluted                                                                       |         | $                                 | (0.04      | ) | $ | (0.14 | ) |
|                                                                          |         |                              |       |   |   |
| Shares used  in calculating net loss per share:                          |         |                              |       |   |   |
| Basic                                                                         |         | 61,198                            |       | 57,385 |   |
|                                                                          |         |                              |       |   |   |
| Diluted                                                                       |         | 61,198                            |       | 57,385 |   |

 

See notes to condensed consolidated financial statements.

 

2

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Stockholders’ Equity**

**For the Three Months Ended March 31, 2006 and2005 (As Restated)**

**and the Nine Months Ended December 31,2005 (As Restated)****(See Note 1)**

**(In thousands) (unaudited)**

 
| ** **                                                              | ** ** | **Common Stock** | ** ** | **Note  Receivable   From   Stockholder** | ** ** | **Accumulated   Other   Comprehensive   Loss** | ** ** | **Accumulated   Deficit** | ** ** | **Stockholders’   Equity** | ** ** | **Total   Comprehensive   Income (Loss)** | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| **Shares**                                                              | ** ** | **Amount**       |
| BALANCES, January 1, 2005                                          |       | 54,805           |       | $                                         | 232,016    |                                           | $          | —                    |       | $                               | (179       | )                                         | $          | (107,001 | ) | $ | 124,836 |   |   |   |
| Net loss (As Restated) (See Note 1)                                |       |             |       |                                      |       |                                           |       |                      |       | (8,119                          | )          | (8,119                                    | )          | $ | (8,119 | ) |
| Change in unrealized gain on short-term  investments                    |       |             |       |                                      |       |                                           |       | 31                        |       |                            |       | 31                                        |       | 31 |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Comprehensive loss                                                      |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       | $ | (8,088 | ) |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Shares issued upon acquisition of Vidus,  net of issuance costs of $478 |       | 5,454            |       | 24,228                                    |       |                                           |       |                      |       |                            |       | 24,228                                    |       |   |   |
| Fully vested options issued upon  acquisition of Vidus                  |       |             |       | 531                                       |       |                                           |       |                      |       |                            |       | 531                                       |       |   |   |
| Exercise of stock options                                               |       | 50               |       | 172                                       |       |                                           |       |                      |       |                            |       | 172                                       |       |   |   |
| Issuance of note receivable to stockholder                              |       |             |       |                                      |       | (11                                            | )          |                      |       |                            |       | (11                                       | )          |   |   |
| Collection of note receivable from  stockholder                         |       |             |       |                                      |       | 1                                              |       |                      |       |                            |       | 1                                         |       |   |   |
| Dividends on preferred stock                                            |       |             |       | (57                                       | )          |                                           |       |                      |       |                            |       | (57                                       | )          |   |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| BALANCES, March 31, 2005 (As Restated) (See Note 1)                |       | 60,309           |       | 256,890                                   |       | (10                                            | )          | (148                      | )          | (115,120                        | )          | 141,612                                   |       |   |   |
| Net income (As Restated) (See  Note 1)                        |       |             |       |                                      |       |                                           |       |                      |       | 36,718                          |       | 36,718                                    |       | $ | 36,718 |   |
| Change in unrealized loss on short-term  investments                    |       |             |       |                                      |       |                                           |       | 70                        |       |                            |       | 70                                        |       | 70 |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Comprehensive income                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       | $ | 36,788 |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Shares issued under employee stock purchase  plan                       |       | 580              |       | 1,678                                     |       |                                           |       |                      |       |                            |       | 1,678                                     |       |   |   |
| Exercise of stock options                                               |       | 265              |       | 406                                       |       |                                           |       |                      |       |                            |       | 406                                       |       |   |   |
| Collection of note receivable from  stockholder                         |       |             |       |                                      |       | 3                                              |       |                      |       |                            |       | 3                                         |       |   |   |
| Dividends on redeemable preferred stock                                 |       |             |       | (379                                      | )          |                                           |       |                      |       |                            |       | (379                                      | )          |   |   |
| Tax benefit on the exercise of employee  stock options                  |       |             |       | 6,752                                     |       |                                           |       |                      |       |                            |       | 6,752                                     |       |   |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| BALANCES, December 31, 2005                                        |       | 61,154           |       | 265,347                                   |       | (7                                             | )          | (78                       | )          | (78,402                         | )          | 186,860                                   |       |   |   |
| Net loss                                                                |       |             |       |                                      |       |                                           |       |                      |       | (2,568                          | )          | (2,568                                    | )          | $ | (2,568 | ) |
| Change in unrealized loss on short-term  investments                    |       |             |       |                                      |       |                                           |       | (21                       | )          |                            |       | (21                                       | )          | (21 | ) |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Comprehensive loss                                                      |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       | $ | (2,589 | ) |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| Exercise of stock options                                               |       | 79               |       | 194                                       |       |                                           |       |                      |       |                            |       | 194                                       |       |   |   |
| Stock-based compensation                                                |       |             |       | 929                                       |       |                                           |       |                      |       |                            |       | 929                                       |       |   |   |
| Collection of note receivable from  stockholder                         |       |             |       |                                      |       | 1                                              |       |                      |       |                            |       | 1                                         |       |   |   |
| Dividends on redeemable preferred stock                                 |       |             |       | (124                                      | )          |                                           |       |                      |       |                            |       | (124                                      | )          |   |   |
|                                                                    |       |             |       |                                      |       |                                           |       |                      |       |                            |       |                                      |       |   |   |
| BALANCES, March 31, 2006                                                |       | 61,233           |       | $                                         | 266,346    |                                           | $          | (6                        | )          | $                               | (99        | )                                         | $          | (80,970 | ) | $ | 185,271 |   |   |   |
|                                                                         |            |                  |            |                                           |            |                                                |            |                           |            |                                 |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

3

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(In thousands) (unaudited)**

 
| ** **                                                                                         | ** **   | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------------|-----------------------------------|------------|
| ** **                                                                                         | ** **   | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                                                         | *** *** | ** **                        | ** ** | **As Restated  (See Note 1)** | ** ** |
| Cash flows  from operating activities:                                                             | * *     | * *                          |       |   |   |
| Net loss                                                                                           |         | $                                 | (2,568     | ) | $ | (8,119 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                       |         |                              |       |   |   |
| Depreciation and amortization                                                                      |         | 1,804                             |       | 999 |   |
| Change in derivative instrument liability                                                          |         | 1,151                             |       | 741 |   |
| Stock-based compensation                                                                           |         | 929                               |       | — |   |
| Provision for doubtful accounts and sales  returns                                                 |         | 32                                |       | 201 |   |
| Provision for inventory reserves                                                                   |         | 22                                |       | 25 |   |
| Loss on disposal of property and equipment                                                         |         | 11                                |       | 33 |   |
| In-process research and development                                                                |         | —                            |       | 5,640 |   |
| Deferred taxes                                                                                     |         | (590                              | )          | — |   |
| Change in assets and liabilities, net of  effect of acquisition:                                   |         |                              |       |   |   |
| Accounts receivable                                                                                |         | 1,680                             |       | 1,230 |   |
| Inventories                                                                                        |         | (4,276                            | )          | (134 | ) |
| Deferred product costs                                                                             |         | (1,746                            | )          | (1,270 | ) |
| Prepaid expenses and other                                                                         |         | 554                               |       | 93 |   |
| Accounts payable                                                                                   |         | 2,848                             |       | 379 |   |
| Accrued and other liabilities                                                                      |         | (1,305                            | )          | (391 | ) |
| Deferred revenue and customer deposits                                                             |         | (1,189                            | )          | (499 | ) |
|                                                                                               |         |                              |       |   |   |
| Net cash used in operating activities                                                              |         | (2,643                            | )          | (1,072 | ) |
|                                                                                               |         |                              |       |   |   |
| Cash flows  from investing activities:                                                             |         |                              |       |   |   |
| Purchase of property and equipment                                                                 |         | (795                              | )          | (848 | ) |
| Purchase of short-term investments                                                                 |         | (16,580                           | )          | (35,132 | ) |
| Proceeds from the sale of short-term  investments                                                  |         | 18,227                            |       | 63,372 |   |
| Acquisition of Vidus, net of cash acquired                                                         |         | —                            |       | (5,229 | ) |
|                                                                                               |         |                              |       |   |   |
| Net cash provided by investing activities                                                          |         | 852                               |       | 22,163 |   |
|                                                                                               |         |                              |       |   |   |
| Cash flows  from financing activities:                                                             |         |                              |       |   |   |
| Proceeds from sale of common stock                                                                 |         | 194                               |       | 172 |   |
| Proceeds from payments on notes receivable  issued to stockholders                                 |         | 1                                 |       | 1 |   |
| Net cash provided by financing activities                                                          |         | 195                               |       | 173 |   |
|                                                                                               |         |                              |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                         |         | (1,596                            | )          | 21,264 |   |
| Cash and  cash equivalents:                                                                        |         |                              |       |   |   |
| Beginning of period                                                                                |         | 25,773                            |       | 14,494 |   |
| End of period                                                                                      |         | $                                 | 24,177     |   | $ | 35,758 |   |
|                                                                                               |         |                              |       |   |   |
| Supplemental  disclosure of cash flow information:                                                 |         |                              |       |   |   |
| Dividends accrued on redeemable preferred  stock                                                   |         | $                                 | 124        |   | $ | 57 |   |
| Change in unrealized loss on short-term  investments, net of tax effects                           |         | $                                 | (21        | ) | $ | 31 |   |
| Cash paid for income taxes                                                                         |         | $                                 | 20         |   | $ | 30 |   |
| Non-cash investing and financing  activities:                                                      |         |                              |       |   |   |   |   |
| Issuance of common stock, preferred stock  and options in connection with the acquisition of Vidus |         | $                                 | —     |   | $ | 38,155 |   |

 

See notes to condensed consolidated financial statements.

 

4

----

 

**@Road, Inc.**

**Notes To CondensedConsolidated Financial Statements**

(unaudited)

 

**Note1 —Summary of Significant Accounting Policies**

 

***Restatement of Financial Statements***

 

Subsequent toDecember 31, 2005, the Company determined that its unaudited quarterly condensedconsolidated financial statements for the periods ended March 31, 2005, June30, 2005 and September 30, 2005 contained errors resulting from the improperaccounting for the common and redeemable preferred stock issued in connectionwith the Vidus acquisition. See “Note 6—Derivative Financial InstrumentLiabilities” for further discussion.

 

The impact onthe Company’s consolidated statement of operations for the three months endedMarch 31, 2005 was an increase in net loss of $741,000. As a result, theaccompanying condensed consolidated financial statements for the three monthsended March 31, 2005 have been restated from the previously reported results tocorrect this error. The following is a summary of the significant effects ofthe restatement (in thousands, except per share data):

 
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------|------------|------------|------------|
| Change in derivative instrument liability     |       | $                           | —     |            | $          | (741       | )          | $ | (741 | ) |
| Total other  income (expense), net            |       |                        | 620        |            |       | (121       | )          |   | (741 | ) |
| Net loss  before taxes                        |       | (7,378                      | )          | (8,119          | )          | (741       | )          |
| Net loss                                      |       | (7,378                      | )          | (8,119          | )          | (741       | )          |
| Net loss  attributable to common stockholders |       | $                           | (7,435     | )               | $          | (8,176     | )          | $ | (741 | ) |
|                                          |       |                        |       |            |       |       |       |
| Net loss per  share:                          |       |                        |       |            |       |       |       |
| Basic                                         |       | $                           | (0.13      | )               | $          | (0.14      | )          | $ | (0.01 | ) |
| Diluted                                       |       | $                           | (0.13      | )               | $          | (0.14      | )          | $ | (0.01 | ) |

 

***Basis ofConsolidation and Presentation***

 

The accompanying condensed consolidated financial statements include @Road, Inc.and its wholly-owned subsidiaries (collectively, the “Company”). Intercompanyaccounts and transactions are eliminated upon consolidation.

 

The accompanying condensed consolidated financial statements wereprepared by the Company, without an audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to suchrules and regulations, although the Company believes the disclosures madeherein are adequate to make the information presented not misleading.

 

In the opinion of management, the financial statements include alladjustments, consisting only of normal recurring adjustments (except for theadjustments to restate these financial statements for the three months endedMarch 31, 2005 discussed above) necessary to fairly present the financialcondition, results of operations, and cash flows for the periods presented.Results of operations for the periods presented are not necessarily indicativeof results to be expected for any other interim period or for the full year.These condensed consolidated financial statements should be read in conjunctionwith the Company’s consolidated financial statements and notes thereto in itsForm 10-K for the year ended December 31, 2005 (Commission FileNo. 000-31511), dated March 22, 2006 and filed with the SEC.

 

5

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***Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses during the reporting period. On an on-goingbasis, the Company evaluates its estimates, including those related to revenuerecognition, stock-based compensation, intangible assets and goodwill,allowance for doubtful accounts, income taxes and legal and othercontingencies. The Company bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. Actual results could differ from those estimates.

 

***Certain SignificantRisks and Uncertainties***

 

TheCompany participates in a dynamic high-technology industry and believes thatadverse changes in any of the following areas could have a material adverseeffect on its future financial position, results of operations or cash flows:the ability of @Road to integrate Vidus operations successfully; the ability of@Road to accelerate or continue to grow as a result of its investmentinitiatives; the ability of @Road and its alliances to market, sell and support@Road solutions; the timing of purchasing and implementation decisions byprospects and customers; competition; the dependence of @Road on mobile datasystems technology, wireless networks, network infrastructure and positioningsystems owned and controlled by others; advances and trends in new technologiesand industry standards; market acceptance of the Company’s existing or newsolutions; development of sales channels; changes in third-party manufacturers,key suppliers, certain strategic or customer relationships; litigation orclaims against the Company based on intellectual property, product, regulatoryor other factors; and the Company’s ability to attract and retain employeesnecessary to support its growth.

 

Motorolais the sole supplier of microcontrollers and certain modems used in the Company’sproducts. Micronet is the sole supplier of our Internet Data Terminal (“*i*DT”) device. Everex is the sole supplierof our Internet Location Manager—WiFi (“*i*LM-W”)device. The Company expects to rely on these suppliers as the sole source forthese components and devices for the next several years.

 

***Foreign CurrencyTransactions***

 

Thefunctional currency of the Company and its foreign subsidiaries is the UnitedStates dollar. Accordingly, all monetary assets and liabilities are translatedat the current exchange rate at the end of the period, non-monetary assets andliabilities are translated at historical rates and revenues and expenses aretranslated at average exchange rates in effect during the period. Transactiongains and losses have not been significant to date and are included in *Other income, net* on the Company’sConsolidated Statement of Operations.

 

***Revenue Recognition***

 

The Companyfollows specific and detailed guidelines in recognizing revenue in accordancewith the provisions of AICPA Statement of Position 97-2, *Software Revenue Recognition*, as amendedby Statement of Position 98-4, *Deferral ofthe Effective Date of a Provision of SOP 97-2* and Statement ofPosition 98-9, *Modification of SOP 97-2*,as well as Accounting Research Bulletin No. 45, *Long-Term Construction-Type Contracts* and Statement ofPosition 81-1, *Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts*. The Companyrecognizes revenue when the price is fixed and determinable, persuasiveevidence of an agreement exists, the obligations under any such agreement arefulfilled and collectibility is probable.

 

The Company’srevenues are comprised of hosted revenue and licensed revenue. Hosted revenueis derived from monthly fees for the Company’s Field Force Management (“FFM”)and Field Asset Management (“FAM”) solutions and monthly or upfront fees forin-vehicle hardware devices enabling a mobile resource to utilize these FFM orFAM solutions. Licensed revenue is comprised of license fees, installation,training and related post-contract customer support (“PCS”) services feesrelating to our Field Service Management (“FSM”) *Taskforce*TMsoftware solution.

 

Monthly feesfor the Company’s hosted solutions are recognized ratably over the contractperiod, which commences (a) upon installation of our proprietary hardwaredevices in our subscriber’s mobile worker vehicles, or (b) upon thecreation of subscription licenses and a subscriber account on its website wheresubscribers have elected to use its solution with a mobile telephone. Upfrontfees for the Company’s hosted solution primarily consist of amounts for thein-vehicle enabling hardware device and peripherals, if any. The Company defersupfront fees at installation and recognizes them ratably over the minimumservice contract period, generally one to five years. Product costs are alsodeferred and amortized over such period. Renewal rates for its hosted solutionsnot considered priced at a bargain in comparison to the upfront fees (asdescribed in Staff Accounting Bulletin No. 104, *Revenue Recognition*). If the Company cannot objectivelydetermine the fair value of any undelivered element included in hostedarrangements, it defers revenue until all elements are delivered, all serviceshave been performed or fair value can objectively be determined.

 

Licensedrevenue associated with the fees for the license of the Company’s FSM *taskforce* product and relatedcustomization and installation services is generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, the Company determines progress to completion based on actual directlabor hours incurred to date as a percentage of the estimated total directlabor hours required to complete the project. The Company periodicallyevaluates the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, the Company has not incurred any such losses. Ifthe amount of revenue recognized exceeds 

 

6

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the amount billed to customers,the excess amount is recorded as unbilled accounts receivable. If the amountbilled exceeds the amount of revenue recognized, the excess amount is recordedas customer deposits.

 

The Companyderives PCS fees from PCS agreements, which are generally initially purchasedat the same time as a license for its *Taskforce*product. PCS can include telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. PCS agreements maygenerally be renewed on an annual basis. The Company recognizes revenue forPCS, based on vendor specific objective evidence (“VSOE”) of fair value,ratably over the term of the PCS period. It generally determines VSOE of PCSbased on the stated fees for PCS renewal set forth in the original licenseagreement. If the Company is unable to establish VSOE of fair value, itrecognizes all fees ratably over the term of the PCS, when the only undeliveredelement is PCS.

 

Forarrangements with multiple elements, such as licenses, customization servicesand PCS services, the Company allocates revenue to each element based upon itsfair value as determined by VSOE. VSOE for each element is based on normalpricing and discounting practices when the element is sold separately. VSOE forPCS services is measured by the stated renewal rate. If the Company cannotobjectively determine the fair value of any undelivered element included inlicense arrangements, it defers revenue until the earliest of either:(a) all elements are delivered, (b) all services have been performedor only PCS services remain to be delivered, or (c) fair value canobjectively be determined. When the fair value of a delivered element has notbeen established, we use the residual method to record license revenue if thefair value of all undelivered elements is determinable. Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the fee is allocated to the delivered elements and isrecognized as revenue, assuming all other criteria have been met.

 

***Comprehensive Loss***

 

SFAS No. 130,*ReportingComprehensive Income*, requires that an enterprise report, by majorcomponents and as a single total, the change in its net assets during theperiod from non-owner sources.  Accumulated other comprehensive loss wascomprised of unrealized losses of $99,000 and $78,000 on short-term investmentsat March 31, 2006 and December 31, 2005, respectively.

 

***Intangible Assets and Goodwill***

 

Intangibleassets resulting from the acquisitions of entities accounted for using thepurchase method of accounting are estimated by management based on the fairvalue of assets received. Identifiable intangible assets are comprised of coredeveloped technology, order backlog, customer relationships, trademarks andtrade names and other intangible assets. Identifiable intangible assets thathave finite useful lives are being amortized over their useful lives of tenyears for core developed technology, three years for order backlog and tenyears for customer relationships. Trademarks and trade names have indefinitelives and as such are not amortized but are tested at least annually forimpairment.

 

Goodwillrepresents the excess of the purchase price over the fair value of the nettangible and identifiable intangible assets acquired in a business combination.The Company follows the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 142, *Goodwilland Other Intangible Assets* (“SFAS 142”), under which goodwill is nolonger subject to amortization.

 

***Impairment of Long-Lived Assets***

 

The Companyevaluates long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of a long-lived asset may notbe recoverable in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.An asset is considered impaired if its carrying amount exceeds the future netcash flow that the asset is expected to generate. If an asset is considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the asset exceeds its fair market value. The Companyassesses the recoverability of long-lived and intangible assets by determiningwhether the unamortized balances can be recovered through undiscounted futurenet cash flows of the related assets. The amount of impairment, if any, ismeasured based on projected discounted future net cash flows.

 

The Companyevaluates goodwill, at a minimum, on an annual basis and whenever events andchanges in circumstances suggest that the carrying amount may not berecoverable. Impairment of goodwill is tested at the reporting unit level bycomparing the reporting unit’s carrying amount, including goodwill, to the fairvalue of the reporting unit. The fair values of the reporting units areestimated using a combination of the income, or discounted cash flows, approachand the market approach, which utilize comparable companies’ data. If the carryingamount of the reporting unit exceeds its fair value, goodwill is consideredimpaired and a second step is performed to measure the amount of impairmentloss, if any. The Company conducted its initial annual impairment test as ofAugust 31, 2005 and determined there was no impairment. During the fourthquarter of 2005, the Company determined that the Vidus trade name was impaired.There were no events or circumstances during the three months ended March 31,2006 indicating that a further assessment was necessary.

 

***Derivative Financial Instruments***

 

TheCompany does not use derivative instruments to hedge exposures to cash flow,market, or foreign currency risks. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”), certain derivatives are 

 

7

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embedded in our Series Bpreferred stock that must be bifurcated and accounted for separately. Theoriginal host instruments were initially reported, at fair value, as PreferredStock and the embedded derivatives were initially reported, at fair value, asliabilities. Because these derivatives do not qualify as hedging instruments,changes in fair values of such derivatives are reported as charges or creditsto income.

 

***Major Customers***

 

For the three months ended March 31, 2006 AT&T Inc. represented 15%of total revenues. For the three months ended March 31, 2005, Verizonaccounted for 15% of total revenues. During the three months ended March 31,2006 and 2005, no other customer represented 10% or more of total revenues.

 

***Recently IssuedAccounting Pronouncements***

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”), that addresses theaccounting for stock-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.The statement eliminates the ability to account for stock-based compensationtransactions using the intrinsic value method as prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”), and generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expense in the consolidated statement of operations.SFAS 123R also requires additional accounting for the tax benefit on employeestock options and for stock issued under the Company’s employee stock purchaseplan. The adoption of SFAS 123R on January 1, 2006, had a material impact onthe Company’s consolidated results of operations and financial position. SeeNote 9 — Employee Benefit Plans for additional disclosure related to FAS 123R.

 

InNovember 2005, the FASB issued FASB Staff Position (“FSP”) Nos. SFAS 115-1and SFAS 124-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*.This FSP addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of other-than-temporary impairments. The adoptionof the FSP did not have a material impact on the Company’s consolidatedstatement of operations and financial condition.

 

OnJune 7, 2005, the FASB issued SFAS No. 154, Accounting Changes andError Corrections, a replacement of APB Opinion No. 20, AccountingChanges, and Statement No. 3, Reporting Accounting Changes in InterimFinancial Statements (“SFAS 154”). SFAS 154 changes the requirements foraccounting and reporting, a change in accounting principle. Previously, mostvoluntary changes in accounting principles were required to be recognized byway of a cumulative effect adjustment within net income during the period ofthe change. SFAS 154 requires retrospective application to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning afterDecember 15, 2005; however, SFAS 154 does not change the transitionprovisions of any existing accounting pronouncements.

 

**Note2 — Basic and Diluted Net Loss per Share**

 

Basicnet loss per share is computed by dividing the net loss attributable tocommon stockholders for the period by the weighted average number of commonshares outstanding during the period. Diluted net loss per share iscomputed by dividing the net loss attributable to common stockholders forthe period by the weighted average number of common shares and potentiallydilutive common shares outstanding during the period. Potentially dilutivecommon shares, composed of unvested restricted common stock and incrementalcommon shares issuable upon the exercise of stock options, are included indiluted net loss per share (using the treasury stock method) to the extentsuch shares are dilutive. Potentially dilutive shares that are anti-dilutive,as calculated based on the weighted average closing price of the Company’scommon stock for the period, are excluded from the calculation of dilutednet loss per share. Common share equivalents are excluded from thecomputation in loss periods, as their effect would be anti-dilutive.

 

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Thefollowing table sets forth the computation of basic and diluted net loss pershare for the periods indicated (in thousands, except per share amounts):

 
| ** **                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | ** **                        | ** ** | **(As Restated)** | ** ** |
| Net loss  attributable to common stockholders (numerator)         |       | $                                 | (2,692     | ) | $ | (8,176 | ) |
| Shares  (denominator):                                            |       |                              |       |   |   |
| Basic                                                             |       |                              |       |   |   |
| Weighted average common shares outstanding                        |       | 61,198                            |       | 57,385 |   |
| Weighted average common shares outstanding  subject to repurchase |       | —                            |       | — |   |
|                                                              |       |                              |       |   |   |
| Shares used in computation                                        |       | 61,198                            |       | 57,385 |   |
| Diluted                                                           |       |                              |       |   |   |
| Dilution impact from option equivalent  shares                    |       | —                            |       | — |   |
| Dilution impact from employee stock  purchase plan                |       | —                            |       | — |   |
| Add back weighted average common shares  subject to repurchase    |       | —                            |       | — |   |
|                                                              |       |                              |       |   |   |
| Shares used in computation                                        |       | 61,198                            |       | 57,385 |   |
|                                                              |       |                              |       |   |   |
| Net loss per  share                                               |       |                              |       |   |   |
| Basic                                                             |       | $                                 | (0.04      | ) | $ | (0.14 | ) |
| Diluted                                                           |       | $                                 | (0.04      | ) | $ | (0.14 | ) |

 

Forthe periods presented, the Company had securities outstanding which couldpotentially dilute basic income per share in the future, but which wereexcluded from the computation of diluted net loss per share in the periodspresented, as their effect would have been anti-dilutive due to the Companybeing in a loss position or due to the shares being subject to repurchase bythe Company on outstanding options with exercise prices greater than theaverage fair market value for the respective periods presented. Suchoutstanding securities consist of the following (shares in thousands):

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Outstanding  options                                    |       | 9,359                             |       | 9,388 |   |
| Weighted average  exercise price of outstanding options |       | $                                 | 4.82       |   | $ | 5.06 |   |
|                                                         |            |                                   |            |  |  |  |  |

 

**Note 3.  Business Combinations, Goodwill andIntangible Assets**

 

OnFebruary 18, 2005, the Company completed the acquisition of Vidus Limited(“Vidus”) in a transaction accounted for as a business combination using thepurchase method. As consideration for the acquisition, the Company issuedapproximately 5.5 million shares of its common stock valued at $24.7 million,newly created redeemable preferred stock (“preferred stock”) valued at approximately$12.9 million, extinguished for cash existing debt of approximately $5.5million in exchange for all of the outstanding shares of Vidus capital stock,and issued approximately 146,000 vested options with a fair value of $531,000.Under the terms of the stock option grants, each option has been classified asa non-qualified stock option, is fully vested, has an exercise price rangingfrom $0.67 to $2.00 per share and has a one-year term. The Company incurredacquisition related costs of $2.6 million, of which $478,000 was allocated tothe issuance of common stock. The purchase price of approximately$46.3 million was allocated among the tangible and identifiable intangibleassets acquired and liabilities assumed on the basis of their estimated fair valueson the acquisition date.

 

The shares ofcommon stock issued in the acquisition were valued in accordance with EmergingIssues Task Force Issue No. 99-12, *Determinationof the Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination* (“EITF 99-12”). In accordance withEITF 99-12, the Company established the first date on which the number of theCompany’s shares and the amount of other consideration became fixed as ofFebruary 18, 2005. Accordingly, the Company valued the transaction using theaverage closing price of the Company’s common stock for the two-day periodending on February 18, 2005, or $4.53 per share.

 

The shares ofredeemable preferred stock issued in the acquisition contain a provisionwhereby the redemption value may be increased based on the future price of theCompany’s common stock (the “top-up” amount) and were recorded at fair value asrequired by SFAS No. 141, *BusinessCombinations* (“SFAS 141”) and Emerging Issues Task Force IssueNo. 97-8, *Accounting for ContingentConsideration Issued in a Purchase Business Combination* (“EITF 97-8”).The fair value of the redeemable preferred stock was determined to be theaggregate of the redemption value of the preferred stock discounted at 6.5%,plus the estimated value of the embedded put and call options and the estimatedtop-up, discounted at the Company’s estimated cost of equity of 14.87%. See “Note6—Derivative Financial Instrument Liability” and “Note 7—Redeemable PreferredStock” for further discussion of the top-up.

 

The fair valueof the stock options was determined using the Black-Scholes option pricingmodel with the following assumptions: no dividend yield, expected volatility of96%, expected life of one year and a risk-free interest rate of 3.09%.

 

The Vidusacquisition was accounted for under SFAS No. 141, and certain specifiedprovisions of SFAS 142. The results of operations of Vidus are included in theCompany’s Condensed Consolidated Statement of Operations beginningFebruary 19, 2005.

 

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The followingtable summarizes the estimated fair values of the tangible assets acquired andthe liabilities assumed at the date of acquisition (in thousands):

 
| Cash                                |   | $      | 1,269  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts  receivable                |   | 1,669  |   |
| Prepaid  expenses and other         |   | 412    |   |
| Property and  equipment             |   | 1,022  |   |
| Notes  receivable from stockholder  |   | 11     |   |
| Total  tangible assets acquired     |   | 4,383  |   |
| Accounts  payable                   |   | (540   | )      |
| Accrued  liabilities                |   | (2,148 | )      |
| Deferred  revenue                   |   | (4,270 | )      |
| Total  tangible liabilities assumed |   | (6,958 | )      |
| Net tangible  liabilities assumed   |   | $      | (2,575 | )      |

 

Under thepurchase method of accounting, the Company allocated the total purchase priceto the acquired net tangible and intangible assets based upon their fair marketvalue as of the date of acquisition, February 18, 2005. The intangible assetsrecognized, apart from goodwill, represented contractual or other legal rightsof Vidus and those intangible assets of Vidus that could be clearly identified.These intangible assets were identified and valued through interviews andanalysis of data provided by Vidus concerning development projects, their stageof development, the time and resources needed to complete them and, ifapplicable, their expected income generating ability. There were no othercontractual or other legal rights of Vidus clearly identifiable by management,other than those identified below.

 

The allocation of the purchase price to the tangible andidentifiable intangible assets acquired and liabilities assumed was as follows(in thousands):

 
| Fair value of net tangible liabilities  assumed |   | $      | (2,575 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| Intangible  assets acquired:                    |   |   |   |
| Core developed technology                       |   | 18,410 |   |
| Order backlog                                   |   | 5,500  |   |
| Customer relationships                          |   | 3,660  |   |
| Trademarks                                      |   | 3,250  |   |
| Trade names                                     |   | 2,270  |   |
|                                            |   | 33,090 |   |
|                                            |   |   |   |
| In-process  research and development            |   | 5,640  |   |
| Costs  allocated to common stock issued         |   | 478    |   |
| Deferred tax  liability, net                    |   | (3,693 | )      |
| Goodwill                                        |   | 13,341 |   |
| Purchase  price                                 |   | $      | 46,281 |   |

 

***Core DevelopedTechnology***

 

Coredeveloped technology of approximately $18.4 million relates to the *Taskforce* technology. At the date ofacquisition, the developed technology was complete and had reachedtechnological feasibility. Any costs to be incurred in the future will relateto the ongoing maintenance of the developed technology and will be expensed asincurred. To estimate the fair value of the developed technology, an incomeapproach was used with a discount rate of 35%, which included an analysis offuture cash flows and the risks associated with achieving such cash flows. Thedeveloped technology is being amortized over its estimated useful life of tenyears.

 

***Order Backlog andCustomer Relationships***

 

Theorder backlog of approximately $5.5 million and the customer relationships ofapproximately $3.7 million represented the fair value of the PCS obligationsand existing customer relationships. To estimate the fair value of the orderbacklog and the customer relationships, an income approach was used with adiscount rate of 30%. The order backlog and customer relationships areamortized over their estimated useful lives of three and ten years,respectively.

 

***Trademarks***

 

The*taskforce*solution has strong namerecognition in European field service management, telecommunications, cable andutilities markets. To estimate the fair value of the trademark an incomeapproach was used with a discount rate of 40%. The Company expects to continueto produce and market the *Taskforce*product. Therefore, an analysis of various economic factors indicated thereperiod of time the trademark would contribute to future cash flows. Becausecash flow is expected to continue indefinitely, the trademark is not beingamortized, but is tested for impairment at least annually and whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable.

 

***Trade Names***

 

TheVidus trade name had strong name recognition in European markets. At the timeof the acquisition, the Company expected to continue to utilize the Vidus tradename in Europe. The fair value was determined using an income approach with adiscount rate of 40% and based on an analysis of various economic factors theCompany determined that the useful life of the trade name was indefinite.During the fourth quarter of 2005, management determined that the acquiredVidus trade name would no longer be utilized. As a result, the Company recordedan impairment charge of $2.3 million.

 

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***In-Process Researchand Development***

 

Developmentprojects that had reached technological feasibility were classified asdeveloped technology, and the value assigned to developed technology wascapitalized. In-process research and development of approximately $5.6 millionreflected research projects that had not reached technological feasibility orhad no alternative future use at the time of the acquisition and wasimmediately expensed. In order to achieve technological feasibility, theCompany estimated the hours required to complete the projects would costapproximately $5.7 million. The Company estimated the fair value assigned toin-process research and development using the income approach, which discountsto present value the cash flows attributable to the technology once it hadreached technological feasibility using a discount rate of 40%. The stages ofcompletion were determined by estimating the costs and time incurred to daterelative to the costs and time expected to be incurred to develop thein-process technology into a commercially viable technology or product, whileconsidering the relative difficulty of completing the various tasks andovercoming the obstacles necessary to attain technological feasibility. Theweighted average stage of completion for all projects, in the aggregate, wasapproximately 80% as of the acquisition date. Cash flows from sales of productsincorporating those technologies commenced in fiscal 2005. Expenditures tocomplete the acquired in-process research and development approximated theoriginal estimates.

 

***Goodwill***

 

Goodwill ofapproximately $13.3 million represents the excess of the purchase price overthe fair value of the net tangible and intangible assets acquired. Theacquisition allows the Company to integrate its technology with Vidus’technology for dynamic scheduling, dispatching, routing and appointment bookingof mobile workers, cross-sell the companies’ solutions and further develop thecombined technologies to provide customers with seamlessly integratedsolutions. The acquisition also creates the ability to expand the Company’sbusiness to Europe and other international markets. These opportunities, alongwith the ability to hire the Vidus workforce, were significant contributingfactors to the establishment of the purchase price, resulting in therecognition of a significant amount of goodwill. The goodwill and intangibleassets were allocated to the licensed reporting segment. The goodwill is notdeductible for tax purposes.

 

The results ofoperations of Vidus are included in the Company’s Consolidated Statement ofOperations from the date of the acquisition. If the Company had acquired Vidusat the beginning of the periods presented, the Company’s unaudited pro formarevenue, net loss, net loss attributable to common stockholders and net lossper share would have been as follows (in thousands, except per share amount):

 
| ** **                                                       | ** ** | **Three Months Ended  March 31, 2005 (As  Restated)** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Revenue                                                          |       | $                                                     | 20,685     |   |   |
| Net loss                                                         |       | (10,804                                               | )          |   |
| Net loss  attributable to common stockholders                    |       | (10,930                                               | )          |   |
| Net loss per  share (basic and diluted)                          |       | (0.18                                                 | )          |   |
| Shares used  in computing net loss per share (basic and diluted) |       | 60,294                                                |       |   |

 

These results are not necessarily indicative of what theactual results of operations would have been if the acquisition of Vidus had infact occurred on the dates or for the periods indicated, nor do they purport toproject the results of operations for any future periods or as of anydate.  These results do not give effectto any cost savings, operating synergies, and revenue enhancements which mayresult from the acquisition of Vidus or the costs of achieving these costsavings, operating synergies, and revenue enhancements.  The in-process research and developmentcharge of approximately $5.6 million is included in the net loss attributableto common stockholders for the three months ended March 31, 2005.

 

***IntangibleAssets***

 

SFAS 142 requires purchased intangible assets otherthan goodwill to be amortized over their expected useful lives unless theselives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulatedamortization. Amortization is computed over the estimated useful lives of therespective assets, generally two to ten years.

 

Intangible assets were as follows (in thousands):

 
| ** **                      | ** ** | **As of March 31, 2006** | ** ** | **As of December 31, 2005**    | ** ** |
|---------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Carrying   Amount**    | ** ** | **Accumulated   Amortization** | ** ** | **Net** | ** ** | **Carrying   Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Amortized  intangible assets:   |       |                     |       |                           |       |   |   |   |   |   |   |   |   |
| Core developed technology       |       | $                        | 23,462     |                           | $          | (7,101 | ) | $ | 16,361 |   | $ | 23,462 |   | $ | (6,641 | ) | $ | 16,821 |   |
| Order backlog                   |       | 5,500                    |       | (2,041                         | )          | 3,459 |   | 5,500 |   | (1,582 | ) | 3,918 |   |
| Customer relationships          |       | 3,660                    |       | (407                           | )          | 3,253 |   | 3,660 |   | (316 | ) | 3,344 |   |
|                            |       |                     |       |                           |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                        | 32,622     |                           | $          | (9,549 | ) | $ | 23,073 |   | $ | 32,622 |   | $ | (8,539 | ) | $ | 24,083 |   |
|                            |       |                     |       |                           |       |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets: |       |                     |       |                           |       |   |   |   |   |   |   |   |   |
| Trademarks                      |       | $                        | 3,250      |                           | $          | — |   | $ | 3,250 |   | $ | 3,250 |   | $ | — |   | $ | 3,250 |   |
|                            |       |                     |       |                           |       |   |   |   |   |   |   |   |   |
| Total  intangible assets        |       | $                        | 35,872     |                           | $          | (9,549 | ) | $ | 26,323 |   | $ | 35,872 |   | $ | (8,539 | ) | $ | 27,333 |   |

 

11

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During the fourth quarter of 2005, managementdetermined that Vidus Limited would officially change its name to @Road,Ltd.  Therefore, the acquired Vidus tradename will no longer be utilized.  Thename change is intended to leverage the @Road brand equity and more closelyreflect the Company’s objective of adding end-to-end MRM solutions offerings inEurope.  As a result, the Company reducedthe carrying value to zero resulting in an impairment charge of $2.3 millionduring the three months ending December 31, 2005.

 

For the threemonths ended March 31, 2006 and 2005, amortization of intangible assets was$1.0 million and $457,000, respectively. The estimated future amortizationexpense of purchased intangible assets as of March 31, 2006 is as follows (in thousands):

 
| Remainder of 2006 |   | $      | 3,030  |   |
|-------------------|--------|--------|--------|--------|
| 2007              |   | 4,040  |   |
| 2008              |   | 2,458  |   |
| 2009              |   | 2,207  |   |
| 2010              |   | 2,207  |   |
| Thereafter        |   | 9,131  |   |
|              |   |   |   |
| Total             |   | $      | 23,073 |   |

 

**Note4 — Short-Term Investments**

 

Short-terminvestments included the following available-for-sale securities at March 31,2006 and December 31, 2005 (in thousands):

 
| ** **                       | ** ** | **March 31, 2006**  | ** ** |
|----------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S.  Government debt securities |       | $                   | 38,273     |   | $ | — |   | $ | (94 | ) | $ | 38,179 |   |
| Municipal  debt securities       |       | 36,157              |       | — |   | (5 | ) | 36,152 |   |
| Corporate  debt securities       |       | 1,644               |       | — |   | — |   | 1,644 |   |
|                             |       |                |       |   |   |   |   |   |   |
| Total                            |       | $                   | 76,074     |   | $ | — |   | $ | (99 | ) | $ | 75,975 |   |

 
| ** **                       | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**   | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S.  Government debt securities |       | $                     | 39,276     |   | $ | — |   | $ | (72 | ) | $ | 39,204 |   |
| Municipal  debt securities       |       | 36,802                |       | — |   | (6 | ) | 36,796 |   |
| Corporate  debt securities       |       | 1,643                 |       | — |   | — |   | 1,643 |   |
|                             |       |                  |       |   |   |   |   |   |   |
| Total                            |       | $                     | 77,721     |   | $ | — |   | $ | (78 | ) | $ | 77,643 |   |

 

In accordance with EITF 03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, the following table showsgross unrealized losses and fair value for those investments that were in anunrealized loss position as of March 31, 2006 and December 31, 2005, aggregatedby investment category and the length of time that individual securities havebeen in a continuous loss position (in thousands):

 
| ** **                      | ** ** | **As of March 31, 2006** | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Less than 12 Months**  | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **Fair Value**           | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** |
| U.S. Government debt securities |       | $                        | 38,179     |   | $ | (94 | ) | $ | — |   | $ | — |   | $ | 38,179 |   | $ | (94 | ) |
| Municipal debt securities       |       | 36,152                   |       | — |   | — |   | — |   | 36,152 |   | — |   |
| Corporate debt securities       |       | 1,644                    |       | (5 | ) | — |   | — |   | 1,644 |   | (5 | ) |
|                            |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Total                           |       | $                        | 75,975     |   | $ | (99 | ) | $ | — |   | $ | — |   | $ | 75,975 |   | $ | (99 | ) |

 

12

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| ** **                      | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Less than 12 Months**     | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **Fair Value**              | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** |
| U.S. Government debt securities |       | $                           | 39,204     |   | $ | (72 | ) | $ | — |   | $ | — |   | $ | 39,204 |   | $ | (72 | ) |
| Municipal debt securities       |       | 36,796                      |       | (6 | ) | — |   | — |   | 36,796 |   | (6 | ) |
| Corporate debt securities       |       | 1,643                       |       | — |   | — |   | — |   | 1,643 |   | — |   |
|                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total                           |       | $                           | 77,643     |   | $ | (78 | ) | $ | — |   | $ | — |   | $ | 77,643 |   | $ | (78 | ) |

 

The company reviews investmentsin debt securities for other than temporary impairment whenever the fair valueof an investment is less than amortized cost and evidence indicates that aninvestment’s carrying amount is not recoverable within a reasonable period oftime. The decline in value of these investments is primarily related to changesin interest rates and is considered to be temporary in nature. When evaluatingthe investments, the Company considers whether it has the ability and intent tohold the investment until a market price recovery and considers whetherevidence indicating the cost of the investment is recoverable outweighsevidence to the contrary. Evidence considered in this assessment includes thereasons for the impairment, compliance with the Company’s investment policy,the severity and duration of the impairment, changes in the value subsequent toyear-end and forecasted performance of the investee. The Company has reviewedthose securities with unrealized losses as of March 31, 2006 and December 31,2005 for other-than-temporary impairment, and has concluded that noother-than-temporary impairment existed as of March 31, 2006 and December 31,2005.

 

**Note5 — Balance Sheet Components**

 

Inventoriesconsist of raw materials, work in process and finished goods, are stated at thelower of cost (average cost) or market and consist of (in thousands):

 
| ** **       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------|------------|---------------------|------------|------------------------|------------|
| Raw  materials   |       | $                   | 2,692      |                   | $          | 1,796 |   |
| Work in  process |       | 2,403               |       | 2,013                  |       |
| Finished  goods  |       | 5,246               |       | 2,278                  |       |
|             |       |                |       |                   |       |
| Total            |       | $                   | 10,341     |                   | $          | 6,087 |   |

 

Property andequipment, net consist of (in thousands):

 
| ** **                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Computers  and software                    |       | $                   | 15,076     |                   | $          | 14,424 |   |
| Manufacturing  and office equipment        |       | 796                 |       | 663                    |       |
| Furniture  and fixtures                    |       | 455                 |       | 455                    |       |
| Leasehold  improvements                    |       | 695                 |       | 695                    |       |
|                                       |       |                |       |                   |       |
| Total                                      |       | 17,022              |       | 16,237                 |       |
| Accumulated  depreciation and amortization |       | (10,837             | )          | (10,042                | )          |
|                                       |       |                |       |                   |       |
| Property and  equipment, net               |       | $                   | 6,185      |                   | $          | 6,195 |   |

 

Accruedliabilities consist of (in thousands):

 
| ** **                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Accrued  compensation and related benefits |       | $                   | 3,240      |                   | $          | 3,629 |   |
| Other  accrued expenses                    |       | 4,252               |       | 5,122                  |       |
| Total                                      |       | $                   | 7,492      |                   | $          | 8,751 |   |

 

**Note6 — Derivative Financial Instrument Liabilities**

 

In connectionwith the Vidus acquisition, the Company issued shares of its Series B-1 and B-2redeemable preferred stock with an embedded feature indexed to the Company’scommon stock, the top-up amount, that is payable to the holders of theredeemable preferred stock upon redemption. See “Note 7—RedeemablePreferred Stock” for further discussion. In accordance with SFAS 133, thetop-up amount is considered a derivative instrument that should be bifurcated fromthe preferred stock host and recognized as either an asset or liability,depending on the rights and obligations under the contract, and should bemeasured at fair value. The Company accounted for changes in the fair value ofthe derivative instrument, which is not designated as a hedging instrument,through the current period earnings.

 

The Companyuses the Monte Carlo simulation of its stock price with the movements in itsstock price following a geometric Brownian motion to value the derivative instrumentthat is recorded as a derivative liability. In valuing the embedded derivative,the 

 

13

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Company used the market priceof its common stock on the date of valuation, a historical volatility and theexpected remaining period to the expiration date of the top-up period. TheCompany used the following valuation assumptions:

 
| ** **                                   | ** ** | **As of** | ** ** | **As of**        | ** ** | **As of** | ** ** | **As of**        | ** ** |
|----------------------------------------------|------------|----------------|------------|------------------|------------|----------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** | **March 31,**  | ** ** | **February 18,** | ** ** |
| ** **                                   | ** ** | **2006**       | ** ** | **2005**         | ** ** | **2005**       | ** ** | **2005**              | ** ** |
| Historical  volatility                       |       | 47             | %          | 54               | %          | 88             | %          | 88                    | %          |
| Expected  remaining period                   |       | 6 months       |       | 9 months         |       | 15 months      |       | 15 months             |       |
| Valuation  date market price of common stock |       | $              | 5.07       |             | $          | 5.23           |       | $                     | 4.10       |   | $ | 4.50 |   |
| Risk-free  interest rate                     |       | 4.75           | %          | 4.33             | %          | 3.32           | %          | 3.07                  | %          |
| Discount  rate                               |       | 15.97          | %          | 16.07            | %          | 15.12          | %          | 14.87                 | %          |
|                                              |            |                |            |                  |            |                |            |                       |            |  |  |  |  |

 

The fair valueof this derivative instrument was estimated at $4.1 million at March 31, 2006and at $2.9 million at December 31, 2005. The change in the fair value of $1.2million was recorded in total other income, net in the consolidated statementof operations for the three months ended March 31, 2006.

 

Based on thehighest ten consecutive trading days average closing price of the Company’scommon stock of $5.44 per share through March 31, 2006, the aggregate top-up,as if determined on March 31, 2006, is $8.7 million. The top-up amount willfurther decrease if, and to the extent that, the average closing price of ourcommon stock for any ten consecutive trading day period ending on or beforeSeptember 25, 2006 is greater than $5.44 per share.

 

**Note7 — Redeemable Preferred Stock**

 

OnFebruary 18, 2005, the Board of Directors of the Company authorized thecreation of four series of preferred stock and designated approximately 44,000,44,000, 5,000 and 5,000 shares as Series A-1, A-2, B-1 and B-2 preferredstock, respectively, of which approximately 24,000, 44,000, 5,000 and 5,000shares of Series A-1, A-2, B-1 and B-2 preferred stock, respectively, wereissued and outstanding as of March 31, 2006.

 

***Dividends***

 

The holders of the Series A-1, A-2, B-1 and B-2 preferred stockare entitled to receive dividends at the rate of $6.50 per share annually. Thedividends accrue day to day, whether or not earned or declared, fromFebruary 18, 2005. The dividends are payable when and if declared by theBoard of Directors or when shares are redeemed. Any accumulation of unpaiddividends on the preferred stock does not bear interest. Accrued dividendstotaled $560,000 as of March 31, 2006.

 

***Redemption***

 

The holders ofthe Series A-1 and B-1 preferred stock may elect to redeem all or aportion of the shares at any time, and the holders of the Series A-2 andB-2 preferred stock may elect to redeem all or a portion of the shares on orafter February 18, 2007.

 

Each share ofSeries A-1 and A-2 preferred stock is redeemable for an amount equal to(i) $100 plus (ii) all declared or accumulated but unpaid dividends.Each share of Series B-1 and B-2 preferred stock is redeemable for anamount equal to (i) $100, plus (ii) all declared or accumulated butunpaid dividends, plus (iii) the top-up amount, if there is no consecutiveten trading day period from September 25, 2005 to September 25, 2006 duringwhich the average per share closing price of the Company’s common stock isgreater than or equal to $7.00. The top-up amount is calculated as follows:$54.2 million less the greater of (i) $38.0 million and (ii) the sum of 5.6million multiplied by the highest average closing price for the Company’scommon stock for any ten consecutive trading day period from September 25, 2005to September 25, 2006 plus $15 million.

 

On or afterFebruary 18, 2009, the Company may redeem all or any portion of theSeries A-1, A-2, B-1, and B-2 preferred stock.

 

***Conversion***

 

Noneof the issued series of preferred stock is convertible.

 

***Liquidation***

 

Series A-1,A-2, B-1 and B-2 preferred stockholders are entitled to receive, uponliquidation, an amount equal to their respective redemption price. The holdersof the Series A-1, A-2, B-1 and B-2 preferred stock rank on a pari passubasis as to the receipt of such distributions and in preference to the holdersof common stock.

 

14

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***Voting***

 

Eachoutstanding share of preferred stock is entitled to eleven (11) votes onall matters, voting with the shares of common stock as a class.

 

The following tableillustrates the activity for each series of preferred stock through March 31,2006 (in thousands):

 
| ** **                                                                 | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-----------|------------|
| Issued at fair value                                                       |       | $              | 2,352      |           | $          | 4,424          |       | $              | 3,205      |      | $          | 2,937 |   | $ | 12,918 |   |
| Reclass of bifurcated derivative  instrument, at fair value at issuance    |       | —         |       | —         |       | (2,719         | )          | (2,451         | )          | (5,170    | )          |
| Amounts accrued for dividends for the three  months ended March 31, 2005   |       | 17             |       | 32             |       | 4              |       | 4              |       | 57        |       |
| Balance March 31, 2005 (As Restated, See  Note 1)                          |       | $              | 2,369      |           | $          | 4,456          |       | $              | 490        |      | $          | 490 |   | $ | 7,805 |   |
| Amounts accrued for dividends for the nine  months ended December 31, 2005 |       | 114            |       | 217            |       | 24             |       | 24             |       | 379       |       |
| Balance December 31, 2005                                                  |       | $              | 2,483      |           | $          | 4,673          |       | $              | 514        |      | $          | 514 |   | $ | 8,184 |   |
| Amounts accrued for dividends for the three  months ended March 31, 2006   |       | 39             |       | 71             |       | 7              |       | 7              |       | 124       |       |
| Balance March 31, 2006                                                     |       | $              | 2,522      |           | $          | 4,744          |       | $              | 521        |      | $          | 521 |   | $ | 8,308 |   |

 

**Note8 — Common Stock**

 

The Company’s Certificate of Incorporation, asamended, authorizes it to issue 250,000,000 shares of common stock.  At March 31, 2006 and 2005 there wereapproximately no shares subject to repurchase rights.

 

At March 31, 2006, the Company had reservedapproximately 16,587,000 shares of common stock available for future issuanceunder its stock option plans, including approximately 9,359,000 shares relatedto outstanding stock options. In addition, the Company had reservedapproximately 2,422,000 shares of common stock available for future issuanceunder the employee stock purchase plan.

 

**Note9 — Employee Benefit Plans**

 

***Adoption of SFAS 123R***

 

TheCompany adopted the provisions of SFAS 123R, on January 1, 2006. Under SFAS123R, stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award at that date, and is recognized as expenseover the employee’s requisite service period (generally over the vesting periodof the award) on a straight-line basis. The Company has no awards with marketor performance conditions. The Company adopted the provisions of SFAS 123Rusing a modified-prospective approach. Under the modified prospective approach,prior periods are not revised for comparative purposes. The valuationprovisions of SFAS 123R apply to new awards and to awards that are outstandingon the effective date and subsequently modified or cancelled. Estimatedcompensation expense for awards outstanding at the effective date will berecognized on a straight-line basis over the remaining service period using thecompensation cost calculated for pro forma disclosure purposes under SFAS 123as adjusted for estimated forfeitures.

 

Theeffect of recording stock-based compensation for the three months ended March31, 2006 was as follows:

 
| ** **                                          | ** ** | **Three months   ended   March 31, 2006** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|
| Stock-based  compensation expense by type of award: |       |                                           |       |
| Employee stock options                              |       | $                                              | 800        |   |
| Employee stock purchase plan                        |       | 130                                            |       |
| Amounts capitalized as inventory                    |       | (1                                             | )          |
| Total  stock-based compensation                     |       | $                                              | 929        |   |
|                                                |       |                                           |       |
| Tax effect  on stock-based compensation             |       | $                                              | 137        |   |
| Net effect  on net loss                             |       | $                                              | 792        |   |
|                                                |       |                                           |       |
| Effect on  earnings per share:                      |       |                                           |       |
| Basic                                               |       | $                                              | 0.01       |   |
| Diluted                                             |       | $                                              | 0.01       |   |

 

TheCompany recorded $929,000 of stock-based compensation expense in its unauditedstatement of operations for the three months ended March 31, 2006. A total of$905,000 of this expense relates to prior year awards vesting after January 1,2006 and $24,000 relates to options granted after the adoption of SFAS 123R.

 

15

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Asof March 31, 2006, there was $5.2 million of total unrecognized compensationcost related to non-vested stock-based employee compensation arrangements. Thecost is expected to be recognized over a weighted-average period of 2.6 years.Stock-based compensation totaling $1,000 was capitalized as inventory.

 

***Valuation Assumptions***

 

Theweighted-average estimated fair value of employee stock options granted duringthe three months ended March 31, 2006 and 2005 was $3.00 and $3.39 per share,respectively. The Company calculated the fair value of each option award on thedate of grant using the Black-Scholes option pricing model with the followingweighted-average assumptions (annualized percentages):

 
| ** **               | ** ** | **Three months ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| **Stock option plans:**  |       |                   |       |   |   |
| Volatility               |       | 69.60                  | %          | 104.00 | % |
| Risk-free interest rate  |       | 4.49                   | %          | 3.77 | % |
| Dividend yield           |       | 0.00                   | %          | 0.00 | % |
| Expected life (in years) |       | 5.00                   |       | 5.00 |   |
| Forfeiture rate          |       | 20.00                  | %          | 0.00 | % |

 
| ** **                         | ** ** | **Three months ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| **Employee stock purchase plans:** |       |                   |       |   |   |
| Volatility                         |       | 60.06                  | %          | 117.00 | % |
| Risk-free interest rate            |       | 4.30                   | %          | 2.05 | % |
| Dividend yield                     |       | 0.00                   | %          | 0.00 | % |
| Expected life (in years)           |       | 0.50                   |       | 0.50 |   |

 

Expectedvolatility is determined using a 50% weighting to both historical volatility ofthe Company’s common stock over a period of 4.5 years following the Company’sinitial public offering and implied volatility based on the Company’s tradedstock options. The risk-free interest rate is calculated using zero couponrates on treasury notes stripped principal for each grant date given theexpected life. The dividend yield of zero is based on the fact that the Companyexpects to invest cash in operations and has never paid cash dividends oncommon stock. The expected life is calculated for the period from the Company’sinitial public offering using the interval between the grant date and theexercise date weighted by the number of shares exercised. The expected life isadjusted for the anticipated behavior in relation to unexercised options.

 

Asstock-based compensation expense recognized in the statement of operations forthe first quarter of fiscal 2006 is based on awards ultimately expected tovest, it is reduced for estimated forfeitures. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Pre-vestingforfeitures were estimated to be approximately 20% in the first quarter offiscal 2006 based on a weighted average historical forfeiture rates. Under theprovisions of SFAS 123R, the Company will record additional expense if theactual forfeiture rate is lower than estimated, and will record a recovery ofprior expense if the actual forfeiture is higher than estimated. In the Company’spro forma information required under SFAS 123 for the periods prior to fiscal2006, the Company accounted for forfeitures as they occurred.

 

***Pro Forma Information under FAS 123 forPeriods Prior to Fiscal 2006***

 

Priorto adopting the provisions of SFAS 123R, the Company provided the disclosuresrequired under SFAS 123 as amended by Statement of Financial AccountingStandards No. 148, *Accounting forStock-Based Compensation — Transition and Disclosures* (“SFAS 148”).

 

16

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Forpurposes of pro forma disclosures under SFAS 123 for the three months endedMarch 31, 2005, the estimated fair value of the stock options was assumed to beamortized to expense over the stock options’ vesting periods. The pro formaeffects of recognizing estimated compensation expense under the fair valuemethod on net loss and loss per common share for the three months ended March31, 2005 were as follows:

 
| ** **                                                                                                   | ** ** | **Three Months   Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                           | ** ** |
| Net loss as  reported (as restated)                                                                          |       | $                                  | (8,119     | ) |
| Add: stock-based employee compensation  expense included in reported net loss, net of tax effect             |       | —                             |       |
| Less: stock-based employee compensation  expense determined under fair value based method, net of tax effect |       | (2,578                             | )          |
|                                                                                                         |       |                               |       |
| Pro forma  net loss income                                                                                   |       | (10,697                            | )          |
| Preferred  stock dividends                                                                                   |       | (57                                | )          |
|                                                                                                         |       |                               |       |
| Pro forma  net loss attributable to common stockholders                                                      |       | $                                  | (10,754    | ) |
|                                                                                                         |       |                               |       |
| Basic net  loss per share:                                                                                   |       |                               |       |
| As reported                                                                                                  |       | $                                  | (0.14      | ) |
|                                                                                                         |       |                               |       |
| Pro forma                                                                                                    |       | $                                  | (0.19      | ) |
|                                                                                                         |       |                               |       |
| Diluted net  loss per share:                                                                                 |       |                               |       |
| As reported                                                                                                  |       | $                                  | (0.14      | ) |
|                                                                                                         |       |                               |       |
| Pro forma                                                                                                    |       | $                                  | (0.19      | ) |

 

***Equity Incentive Plans***

 

The Company has equity incentiveplans for directors, officers and employees. Stock options granted under theseplans generally vest 25% one year from the date of grant and the remainder vestat a rate of 2.08% per month thereafter. Grants to existing employees generallyvest 25% per year on the anniversary of the grant. Non-employee directors uponbecoming a director receive an initial grant of options to purchase 40,000shares vesting over 4 years and annual grants of options to purchase 10,000shares vesting over one year. Options generally expire 10 years from thedate of grant. The Company’s equity incentive plans contain a provision thatautomatically increases through 2010, on each January 1, the number ofshares reserved for issuance under these plans by the lesser of 2,500,000shares or four percent of the total shares outstanding on the last day of thepreceding year.

 

17

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The following table summarizesactivity under the Company’s equity incentive plans for the three months endedMarch 31, 2006 (in thousands, except per share amounts):

 

| ** **                                     | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted**     | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|---------------|------------|--------------|------------|------------------|------------|---------------|------------|
| ** **                                     | ** ** | ** **    | ** ** | **Weighted** | ** ** | **Average**      | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | **Average**  | ** ** | **Remaining**    | ** ** | **Aggregate** | ** ** |
| ** **                                     | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**  | ** ** | **Intrinsic** | ** ** |
| ** **                                     | ** ** | **Shares**    | ** ** | **Price**    | ** ** | **Life (Years)** | ** ** | **Value**     | ** ** |
| Outstanding at January 1, 2006                 |       | 9,571         |       | $            | 4.81       |             |       |          |       |   |
| Granted                                        |       | 234           |       | 4.91         |       |             |       |          |       |
| Exercised                                      |       | (79           | )          | 2.44         |       |             |       |          |       |
| Canceled                                       |       | (367          | )          | 5.16         |       |             |       |          |       |
| Outstanding at March 31, 2006                  |       | 9,359         |       | $            | 4.82       |             | 7.07       |          | $          | 11,959 |   |
| Vested and expected to vest at March 31,  2006 |       | 8,332         |       | $            | 4.94       |             | 6.87       |          | $          | 10,713 |   |
| Options exercisable at March 31, 2006          |       | 5,564         |       | $            | 5.45       |             | 5.94       |          | $          | 7,351 |   |

 

The aggregate intrinsic value is calculated as the difference betweenthe exercise price of the underlying awards and the quoted price of theCompany’s common stock for the 6.9 million options that were in-the-money atMarch 31, 2006. As of March 31, 2006, the closing price of the Company’s commonstock was $5.07 per share. In-the-money options are options with an exerciseprice lower than the $5.07 closing price. Out-of-the-money options are optionswith an exercise price greater than the $5.07 closing price. The totalintrinsic values of options exercised during the three months ended March 31,2006 and 2005 were $193,000 and $115,000, respectively, determined as of thedate of option exercise. The total cash received from employees as a result ofemployee stock option exercises during the three months ended March 31, 2006and 2005 was approximately $194,000 and $172,000, respectively.

 

Additional information regardingoptions outstanding as of March 31, 2006 is as follows (shares in thousands):

 
| ** **         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                     | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number**              | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.07 -  1.63      |       | 794                     |       | 4.18                                                        |       | $ | 1.22 |   | 794 |   | $ | 1.22 |   |
| 1.97 -  2.00       |       | 859                     |       | 5.40                                                        |       | 2.00 |   | 859 |   | 2.00 |   |
| 2.07 -  3.20       |       | 912                     |       | 8.83                                                        |       | 2.77 |   | 125 |   | 2.20 |   |
| 3.40 -  3.69       |       | 1,596                   |       | 7.60                                                        |       | 3.54 |   | 637 |   | 3.69 |   |
| 3.85 -  4.36       |       | 1,377                   |       | 8.69                                                        |       | 4.02 |   | 280 |   | 4.10 |   |
| 4.48 -  5.20       |       | 1,423                   |       | 7.32                                                        |       | 4.89 |   | 701 |   | 4.96 |   |
| 5.30 -  6.38       |       | 365                     |       | 7.62                                                        |       | 5.75 |   | 135 |   | 5.86 |   |
| 6.40 – 9.00   |       | 977                     |       | 6.10                                                        |       | 7.70 |   | 977 |   | 7.70 |   |
| 9.90 -  14.58      |       | 1,056                   |       | 6.54                                                        |       | 11.51 |   | 1,056 |   | 11.51 |   |
|               |       | 9,359                   |       | 7.07                                                        |       | $ | 4.82 |   | 5,564 |   | $ | 5.45 |   |

 
| ** **                | ** ** | **Options Exercisable** | ** ** | **Options Unexercisable**              | ** ** | **Total Options**       | ** ** |
|---------------------------|------------|-------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Number   of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| In-the-money              |       | 3,298                   |       | $                                      | 2.84       |                    | 3,559      |   | $ | 3.78 |   | 6,857 |   | $ | 3.33 |   |
| Out-of-the-money          |       | 2,266                   |       | 9.26                                   |       | 236                     |       | 5.67 |   | 2,502 |   | 8.92 |   |
| Total options outstanding |       | 5,564                   |       | 5.45                                   |       | 3,795                   |       | 3.89 |   | 9,359 |   | 4.82 |   |
|                           |            |                         |            |                                        |            |                         |            |  |  |  |  |  |  |  |  |  |

 

TheCompany settles employee stock option exercises with newly issued commonshares.

 

***Employee StockPurchase Plan***

 

The Company has an employeestock purchase plan for all eligible employees. This plan is consideredcompensatory under SFAS 123R. Under the plan, shares of its common stockmay be purchased over an offering period with a maximum duration of two yearsat 85% of the lower of the fair market value on the first day of the applicableoffering period or on the last day of the six-month purchase period. Employees maypurchase up to 1,800 shares having a value not exceeding 20% of their grosscompensation during an offering period. During the years endedDecember 31, 2005, employees purchased approximately 580,000 shares at anaverage price of $2.89 per share. There were no shares purchased during thethree months ended March 31, 2006. At March 31, 2006, approximately 2,422,000shares of common stock were reserved for future issuance. The Company’semployee stock purchase plan contains a provision that automatically increases,on each January 1, the number of shares reserved for issuance under theemployee stock purchase plan by the lesser of 900,000 or two percent of thetotal shares outstanding on the last day of the preceding year.

 

18

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***Receivable fromSales of Stock***

 

Asa result of the Vidus acquisition, the Company has one note receivableoutstanding from an employee that is secured by common stock. The notereceivable totals $6,000 which will be fully paid by 2007.

 

***401(k) Saving and Retirement Plan***

 

TheCompany sponsors a 401(k) Saving and Retirement Plan (“Plan”) for allemployees who meet certain eligibility requirements. Participants maycontribute, on a pre-tax basis, between 1 percent and 15 percent oftheir annual compensation, but not to exceed a maximum contribution amountpursuant to Section 401(k) of the Internal Revenue Code. The Companyis not required to contribute, nor has it contributed, to the Plan for any ofthe years presented.

 

**Note10 — Segment Reporting**

 

Reportablesegments are based upon the Company’s internal organization structure, themanner in which the operations are managed, the criteria used by the Company’schief operating decision-maker to evaluate segment performance, theavailability of separate financial information. The Company’s chief operatingdecision-maker is its Chief Executive Officer.

 

Effective withthe acquisition of Vidus, the Company reports the results of its operations intwo segments: Hosted and Licensed. The segments are managed separately becauseeach offers different products and serves different markets. The Hosted segmentprovides FFM and FAM solutions that connect mobile workers in the field tocorporate data on demand, help measure overall mobile workforce performance andmanage mobile assets. The Licensed segment provides customers with the Company’s**FSM*Taskforce*solution which is designed to enable a predictable and reliable customerexperience from commitment to service fulfillment; and to help synchronize thecall center and field service operation.

 

The financialinformation used by the Company’s chief operating decision-maker includes netrevenue from external customers, gross margins and net loss for each of thesesegments.

 

Informationabout operations by reporting segment is as follows (in thousands):

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2006**                         | ** ** | **2005 (As Restated)** | ** ** |
| ** **                                | ** ** | **Hosted**                       | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenue from external customers       |       | $                                | 20,963     |   | $ | 3,782 |   | $ | 24,745 |   | $ | 19,490 |   | $ | 502 |   | $ | 19,992 |   |
| Cost of  revenue                          |       | 11,002                           |       | 1,230 |   | 12,232 |   | 9,524 |   | 700 |   | 10,224 |   |
| Intangibles  amortization                 |       | —                           |       | 1,010 |   | 1,010 |   | — |   | 457 |   | 457 |   |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross Margin                              |       | $                                | 9,961      |   | $ | 1,542 |   | $ | 11,503 |   | $ | 9,966 |   | $ | (655 | ) | $ | 9,311 |   |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin  percentage                  |       | 48                               | %          | 41 | % | 46 | % | 51 | % | (130 | %) | 47 | % |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loss before  income taxes                 |       | $                                | (951       | ) | $ | (2,207 | ) | $ | (3,158 | ) | $ | (364 | ) | $ | (7,755 | ) | $ | (8,119 | ) |
| Provision for (benefit from) income taxes |       | 344                              |       | (934 | ) | (590 | ) | — |   | — |   | — |   |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                  |       | $                                | (1,295     | ) | $ | (1,273 | ) | $ | (2,568 | ) | $ | (364 | ) | $ | (7,755 | ) | $ | (8,119 | ) |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                              |       | $                                | 605        |   | $ | 189 |   | $ | 794 |   | $ | 484 |   | $ | 58 |   | $ | 542 |   |

 

Revenues areattributed to countries based on the location of the customer.  Thedistribution of revenue by geographic area was summarized as follows (inthousands):

 
| ** **                               | ** **   | **Three Months Ended** | ** ** |
|------------------------------------------|--------------|------------------------|------------|
| ** **                               | ** **   | **March 31,**          | ** ** |
| ** **                               | ** **   | **2006**               | ** ** | **2005** | ** ** |
| ** **                               | *** *** | ** **             | ** ** | **(As Restated)** | ** ** |
| **Revenue from Unaffiliated Customers:** | * *     | * *               |       |   |   |
| United  States and Canada                |         | $                      | 20,963     |   | $ | 19,490 |   |
| Europe                                   |         | 3,782                  |       | 502 |   |
|                                     |         |                   |       |   |   |
|                                     |         | $                      | 24,745     |   | $ | 19,992 |   |

 

Long-livedassets are allocated among geographies based upon the country in which thelong-lived asset is located or owned.   

 

19

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The distribution of long-lived assets by geographicarea was summarized as follows (in thousands):

 

| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **Long-Lived  Assets, Net:** |       |               |       |                  |       |
| United States                |       | $                  | 45,356     |                  | $          | 45,715 |   |
| United Kingdom               |       | 41,329             |       | 41,773                |       |
| India                        |       | 655                |       | 312                   |       |
|                         |       |               |       |                  |       |
|                         |       | $                  | 87,340     |                  | $          | 87,800 |   |

 

**Note 11 — Commitments andContingencies**

 

***Lease Commitments***

 

The following tablerepresents the future minimum lease payments under non-cancelable operating,capital and financing leases as of March 31, 2006 (in thousands).

 

| Remainder of  2006            |   | $      | 1,546  |   |
|-------------------------------|--------|--------|--------|--------|
| 2007                          |   | 1,968  |   |
| 2008                          |   | 1,798  |   |
| 2009                          |   | 1,240  |   |
| 2010                          |   | 476    |   |
| Thereafter:                   |   | — |   |
| Total minimum  lease payments |   | $      | 7,028  |   |

 

The Company recognizesrent expense on a straight-line basis over the lease period and has accrued forrent expense incurred but not paid. Rent expense was approximately $530,000 and$667,000 (net of sublease income of approximately none and $9,000) for thethree months ended March 31, 2006 and 2005, respectively.

 

The Company has futureminimum lease payments for capital and financing leases for office equipmentand furniture in the amount of $93,000 included in the table above.

 

On February 1, 2006,the Company entered into a lease for its future research and development andcustomer service center from February 2006 through January 2009,occupying 37,910 square feet in Chennai India. The total minimum future leasepayments are included in the table above.

 

***Purchase Commitments***

 

At March 31, 2006, theCompany had non-cancelable inventory purchase commitments totalingapproximately $6.6 million and other purchase obligations totalingapproximately $4.4 million.

 

***Legal Proceedings***

 

Fromtime to time, the Company is subject to claims in legal proceedings arising inthe normal course of business. Based on evaluation of these matters, theCompany believes that these matters will not have a material effect on theresults of operations or financial position of the Company.

 

***Other Contingencies***

 

The Company from time totime enters into certain types of agreements that contingently require it toindemnify parties against third party claims. These agreements primarily relateto: (i) certain agreements with the Company’s officers, directors andemployees and third parties, under which the Company may be required toindemnify such persons for liabilities arising out of their duties to theCompany and (ii) certain agreements under which the Company indemnifiescustomers and other third parties for claims such as those arising fromintellectual property infringement, personal injury, or non-performance underthe agreement. Such indemnification provisions are accounted for in accordancewith SFAS No. 5,*Accounting forContingencies*. To date, the Company has not incurred any costsrelated to any claims under such indemnification provisions.

 

The terms of suchobligations vary. Because the amounts of the obligation in these types ofagreements often are not explicitly stated, the overall maximum amount of theobligations cannot be reasonably estimated. Historically, the Company has notbeen obligated to make any payments for these obligations, and no liabilitieshave been recorded for these obligations on the Company’s balance sheet as of March31, 2006.

 

20

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In general, the Companyprovides its customers a 12-month limited warranty that the hardware furnishedunder the hosted agreements will be free from defects in materials andworkmanship and will substantially conform to the specifications for suchhardware. The Company’s policy is to expense such costs as incurred. To date,the Company has incurred minimal costs related to this limited warrantyobligation.

 

The Company also providesits European customers with the longer of the European Union statutory warrantyof 90 days or country specific warranty of up to 365 days. If the warranty isinvoked, the Company may be required to correct errors in its software ratherthan refund any fees under the arrangement. As of March 31, 2006, this warrantyhas not been invoked by any of the Company’s customers.

 

**Item 2.Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

The following discussionshould be read in conjunction with the consolidated financial statements andthe related notes included in this Form 10-Q, in our Form 10-K for the yearended December 31, 2005 and in our other filings with the SEC. Except for thehistorical information contained herein, the matters discussed in thisQuarterly Report on Form 10-Q are forward-looking statements involving risksand uncertainties that could cause actual results to differ materially fromthose in such forward-looking statements. Numerous factors, risks anduncertainties affect our operating results and could cause our actual resultsto differ materially from forecasts and estimates or from any otherforward-looking statements made by us or on our behalf and there can be noassurance that future results will meet expectations, estimates or projections.Further information regarding these and other risks is included in thisQuarterly Report on Form 10-Q under the “Factors that Could Affect FutureResults,” section below, elsewhere in this Quarterly Report on form 10-Q and inour other filings with the SEC.

 

**Overview**

 

We are a leading providerof mobile resource management (“MRM”) solutions, a category of businessproductivity solutions designed to enable the effective management of mobileresources. Our MRM solutions allow customers to improve productivity byenabling the effective management of the activities of their mobile workers,assets, goods and services. Currently, we market and sell our solutions to arange of customers in North America and Europe. We offer Field Force Management(“FFM”) solutions, including our GeoManagerSM, PathwaySMand PorticoSM solutions, designed to help companies better managetheir mobile workers; Field Service Management (“FSM”) solutions, such as ourTaskforceTM software, designed to help companies better manage theirmobile workers’ work; and Field Asset Management (“FAM”) solutions, such asVehicle Diagnostics and StatusSensors, designed to help companies better managetheir mobile workers’ assets in the field. At March 31, 2006, approximately 176,000mobile resources were enabled with our solutions, on either a subscription or aper seat license basis.

 

We report the results of our operations in twosegments: Hosted and Licensed. The segments are managed separately because eachoffers different products and serves different segments of the market. TheHosted segment provides the FFM and FAM solutions that connect mobile workersin the field to corporate data on demand, help measure overall mobile workforceperformance and manage mobile assets. The Licensed segment provides customerswith our FSM solution, which is designed to enable a predictable and reliablecustomer experience from commitment to service fulfillment; and to helpsynchronize the call center and field service operation.

 

Subsequent to December31, 2005, we determined that our condensed consolidated financial statementscontained errors resulting from the improper accounting for the common andredeemable preferred stock issued in connection with the Vidus acquisition.Accordingly, the unaudited quarterly financial data for the period ended March31, 2005 presented herein has been restated. The impact on our consolidatedstatement of operations for the three months ended March 31, 2005 was an increasein net loss of $741,000.

 

The accompanying Management’s Discussion and Analysisof Financial Condition and Results of Operations gives effect to therestatement of the condensed consolidated financial statements as described inNote 1 to the condensed consolidated financial statements.

 

**Critical Accounting Policies,Judgments and Estimates**

 

***General***

 

The accompanying discussion and analysis of ourfinancial condition and results of operations are based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. We believe thereare several accounting policies that are critical to understanding ourconsolidated financial statements as these policies affect the reported amountsof revenue and expenses and involve management’s judgment regarding significantestimates. We have based our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Our senior management has reviewed our critical accounting policiesand their application in the preparation of our financial statements andrelated disclosures and discussed the development, selection and disclosure ofsignificant estimates with the Audit Committee of our Board of Directors. Tothe extent that actual results differ from those estimates, our future resultsof operations may be affected.

 

***Revenue Recognition***

 

We follow specific and detailed guidelines inrecognizing revenue in accordance with the provisions of AICPA Statement ofPosition 97-2, *Software Revenue Recognition*,as amended by Statement of Position 98-4, *Deferralof the Effective Date of a Provision of SOP 97-2*and Statement ofPosition 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*,as well as Accounting Research Bulletin No. 45, *Long-Term Construction-Type Contracts*and Statement ofPosition 81-1*, Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.*Werecognize revenue when the price is fixed and determinable, persuasive evidenceof an agreement exists, our obligations under any such agreement are fulfilledand collectibility is probable.

 

Our revenues are comprised of hosted revenue andlicensed revenue. Hosted revenue is derived from monthly fees for our FFM andFAM solutions and monthly or upfront fees for in-vehicle hardware devicesenabling a mobile resource to utilize these FFM or FAM solutions. Licensedrevenue is comprised of license fees, installation, training and relatedpost-contract customer support (“PCS”) service fees relating to our FSMsolution.

 

21

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Monthly fees for our hosted solutions are recognizedratably over the contract period, which commences (a) upon installation of ourproprietary hardware devices in our customer’s mobile worker vehicles or (b)upon the creation of subscription licenses and a customer account on ourwebsite where customers have elected to use our solution with a mobiletelephone. Upfront fees for our hosted solution primarily consist of amountsfor the in-vehicle enabling hardware device and peripherals, if any. We deferupfront fees at installation and recognize them ratably over the minimumservice contract period, generally one to five years. Product costs are alsodeferred and amortized over such period. Renewal rates for our hosted solutionsare not considered priced at a bargain in comparison to the upfront fees (asdescribed in Staff Accounting Bulletin No. 104, *Revenue Recognition*). If we cannot objectively determine thefair value of any undelivered element included in hosted arrangements, we deferrevenue until all elements are delivered, all services have been performed orfair value can objectively be determined.

 

Licensed revenue associated with the fees for thelicense of our Taskforce product and related customization and installationservices is generally recognized using the percentage-of-completion method ofaccounting over the period that services are performed. For agreementsaccounted for under the percentage-of-completion method, we determine progressto completion based on actual direct labor hours incurred to date as apercentage of the estimated total direct labor hours required to complete theproject. We periodically evaluate the actual status of each project to ensurethat the estimates to complete each contract remain accurate. A provision forestimated losses on contracts is made in the period in which the loss becomesprobable and can be reasonably estimated. To date, we have not incurred anysuch losses.

 

If the amount of licensed revenue recognized under thepercentage of completion method exceeds the amount billed to customers, the excessamount is recorded as unbilled accounts receivable. If the amount billedexceeds the amount of revenue recognized, the excess amount is recorded ascustomer deposits.

 

Revenue recognized in any period is dependent on ourprogress toward completion of projects in progress. For projects that were notcomplete as of March 31, 2006 and 2005, the following table illustrates thetotal direct labor hours incurred as a percentage of estimated total directlabor hours required to complete these projects.

** **

| ** **                                                                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Total direct  labor hours incurred to date as a % of estimated total direct labor hours  required to complete projects |       | 65                                               | %          | — | % |

 

Significant management judgment and discretion areused to estimate total direct labor hours. Any changes in or deviations fromthese estimates could have a material effect on the amount of revenue werecognize in any period. Based on our results for the three months ended March31, 2006, a ten percent deviation from our estimated total direct labor hoursrequired to complete projects uncompleted at March 31, 2006 would have resultedin an insignificant increase or decrease in net loss attributable to commonstockholders.

 

We derive PCS fees from PCS agreements, which aregenerally initially purchased at the same time as a license for our Taskforceproduct. PCS can include telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. PCS agreements maygenerally be renewed on an annual basis. We recognize revenue for PCS based onvendor specific objective evidence (“VSOE”) of fair value ratably over the termof the PCS period. We generally determine VSOE of PCS based on the stated feesfor PCS renewal set forth in the original license agreement. If we are unableto establish VSOE of fair value, we recognize the entire arrangement feeratably over the term of the PCS, when the only undelivered element is PCS.

 

For arrangements with multiple elements, such aslicenses, customization services and PCS services, we allocate revenue to eachelement based upon its fair value as determined by VSOE. VSOE for each elementis based on normal pricing and discounting practices when the element is soldseparately. VSOE for PCS services is measured by the stated renewal rate. If wecannot objectively determine the fair value of any undelivered element includedin license arrangements, we defer revenue until the earliest to occur of thefollowing: (a) all elements are delivered, (b) all services have been performedor only PCS services remain to be delivered, or (c) fair value can objectivelybe determined. When the fair value of a delivered element has not beenestablished, we use the residual method to record license revenue if the fairvalue of all undelivered elements is determinable. Under the residual method,the fair value of the undelivered elements is deferred and the remainingportion of the fee is allocated to the delivered elements and is recognized asrevenue assuming all other criteria have been met.

 

***Stock-based Compensation***

 

We adopted the provisionsof Statement of Financial Accounting Standards No. 123 (revised), *Share-Based Payment* (“SFAS 123R”), onJanuary 1, 2006. During the quarter ended March 31, 2006, we recordedstock-based compensation expense of $929,000 in accordance with SFAS 123R. Thecurrent period stock-based compensation recognized is based on the amortizationof the fair value of stock options as determined on their date of grant using aBlack-Scholes option valuation model. The estimate of fair value under theBlack-Scholes option valuation model is based upon certain assumptionsincluding stock price volatility, risk-free interest rate, dividend yield,expected life in years and forfeiture rate.

 

22

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Expected volatility of 69.6%is determined using a 50% weighting for both historical volatility of our commonstock over a period of 4.5 years following our initial public offering andimplied volatility based on our traded stock options. If our stock pricevolatility were to change by 10%, the weighted average estimated fair value ofstock options granted during the three months ended March 31, 2006 would changeby 6%.

 

Theexpected life of 5.0 years is calculated for the period from our initial publicoffering using the interval between the grant date and the exercise dateweighted by the number of shares exercised. The expected life is adjusted forthe anticipated behavior in relation to unexercised options. If the expectedlife were to change by 10%, the weighted average estimated fair value of stockoptions granted during the three months ended March 31, 2006 would change by 4%.

 

We are required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest. The forfeiture rate of 20% is calculated based on aweighted average historical forfeiture rate. If the actual forfeiture rate ishigher than the original estimate, we will record a recovery of prior expense.If the actual forfeiture rate is lower than the original estimate, we willrecord additional expense.

 

These assumptionsrepresent management’s best estimates, but these estimates involve inherentuncertainties and the application of management judgment. As a result, if otherassumptions had been used, our recorded and pro forma stock-based compensationexpense could have been materially different from that depicted above.

 

***Valuation ofIntangible Assets and Goodwill***

 

In accordance with the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 141, *Business Combinations*(“SFAS 141”), the purchase price of anacquired company is allocated between intangible assets and the net tangibleassets of the acquired business with the residual of the purchase pricerecorded as goodwill. The determination of the value of the intangible assetsacquired and their expected lives involves certain judgments and estimates.These judgments can include, but are not limited to, the cash flows that anasset is expected to generate in the future and the appropriate weightedaverage cost of capital.

 

At March 31, 2006, our goodwill totaled $13.3 millionand our identifiable intangible assets totaled $26.3 million. In accordancewith the provisions of SFAS 142, *Goodwilland Other Intangible Assets*, we assess the impairment of goodwilland indefinite lived identifiable intangible assets of our reportable units atleast annually, or more often if events or changes in circumstances indicatethat the carrying value may not be recoverable. This assessment is based upon adiscounted cash flow analysis and analysis of our market capitalization. Theestimate of cash flow is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined by our management. Our estimates of discounted cash flows may differfrom actual cash flows due to, among other things, economic conditions, changesto the business model or changes in operating performance.

 

Significant differences between these estimates andactual cash flows could materially affect our future financial results. Weconducted our initial annual impairment test as of August 31, 2005 anddetermined there was no impairment. During the fourth quarter of 2005, wedetermined that the acquired Vidus trade name was impaired and as a result,reduced the carrying value of the trade name to zero. There were no events orcircumstances during the three months ended March 31, 2006 indicating that afurther assessment was necessary.

 

***Allowance forDoubtful Accounts***

 

Historically, we have had a significant number ofsmall- to medium-sized companies utilizing our solutions. These customers areinvolved in diverse businesses. Our payment arrangements with customersgenerally provide 30 to 45 day payment terms. When customers contract with us,we assess their creditworthiness.

 

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The nature of our relationship with customers isinherently long-term and we have extended and may extend payment terms on anexception basis. We regularly review our customers’ ability to satisfy theirpayment obligations and provide an allowance for doubtful accounts for specificreceivables that we believe are not collectible. When these conditions arise,we suspend recognition of revenue until collection becomes probable or cash iscollected. Beyond these specific customer accounts, we record an allowancebased on the size and age of all receivable balances against which we have notestablished a specific allowance, current economic trends and historicalexperience with collections. The following table illustrates the allowance fordoubtful accounts as a percentage of gross accounts receivable as of March 31,2006 and December 31, 2005:

 
| ** **                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Gross accounts  receivable                                           | ** ** | $                  | 11,171     |                  | $          | 12,851 |   |
| Allowance for  doubtful accounts                                     | ** ** | $                  | 373        |                  | $          | 376 |   |
| Allowance for  doubtful accounts as a % of gross accounts receivable |       | 3.3                | %          | 2.9                   | %          |

 

Historically, our actual losses and credits have beenconsistent with these provisions. We believe that we can make reliableestimates for doubtful accounts; however, the size and diversity of ourcustomer base, as well as overall economic conditions, may affect our abilityto accurately estimate bad debt expense. Based on our results for the threemonths ended March 31, 2006, a ten basis point deviation in the allowance for doubtfulaccounts as a percentage of gross accounts receivable would have resulted in aninsignificant increase or decrease in net loss attributable to common stockholders.

 

***Deferred Tax Assets***

 

We have substantial deferred tax assets that relate toprior periods’ losses, primarily in the United States and the United Kingdom.We evaluate these deferred tax assets in each tax jurisdiction by estimatingthe likelihood of generating future profits to realize these assets. In bothjurisdictions, we have concluded that it is more likely than not that we willgenerate sufficient future taxable income to realize these deferred tax assets.A valuation allowance has been established for deferred tax assets which we donot believe meet the more likely than not criteria established by Statement ofFinancial Account Standards No. 109, *Accountingfor Income Taxes.*This evaluation of whether it is more likely thannot that such deferred tax assets will be realized must be continuouslyevaluated due to changes in market conditions, changes in tax laws, taxplanning strategies or other factors. To the extent we establish a valuationallowance or change the allowance in a period, we reflect the change with acorresponding increase or decrease in our tax provision in our consolidatedstatement of operations. At March 31, 2006, we maintained an allowance oncertain state net operating losses and state tax credits based on ourassessment that it is more likely than not that the deferred tax asset relatedto these items will not be realized. The deferred tax asset, net of a valuationallowance of $342,000, totaled $48.5 million as of March 31, 2006 and waspartially offset by deferred tax liabilities of $6.2 million.

 

**RESULTS OF OPERATIONS**

 

**The three months ended March 31, 2006and 2005.**

 

***Hosted revenue,cost of hosted revenue, hosted gross margin***

 

| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Hosted revenue                  |       | $                                                | 20,963     |   | $ | 19,490 |   |
|                            |       |                                             |       |   |   |
| Cost of hosted  revenue         |       | 11,002                                           |       | 9,524 |   |
| ** **                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Hosted gross  margin            |       | $                                                | 9,961      |   | $ | 9,966 |   |
|                            |       |                                             |       |   |   |
| Hosted gross  margin percentage |       | 48                                               | %          | 51 | % |

 

***Hosted revenue***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted revenue                     |       | $                                                | 20,963     |   | 8 | % | $ | 19,490 |   |
| As a percentage  of total revenues |       | 85                                               | %          |   |   | 97 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Hosted revenue is comprised of monthly fees for ourFFM and FAM solutions, and monthly or upfront fees for in-vehicle hardwaredevices enabling a mobile resource to utilize these FFM and FAM solutions. Ourhosted revenue is affected by a number of factors, including subscriber growth,the rate at which service features or add-ons are adopted, the pricingassociated with the size and term of subscriber contracts and purchases of ourin-vehicle hardware devices. Given the generally fixed nature of ourarrangements with our subscribers and ratable revenue recognition, the impacton revenues of changes in current prices for hosted solutions is tempered. Thisis because revenues from new pricing are layered on top of revenues fromexisting subscribers.

 

As new subscribers purchase our in-vehicle hardwaredevices or as existing subscribers choose to purchase new in-vehicle hardwaredevices, the amount of deferred revenue recognized ratably over the expectedlife of the subscriber increases. This effect is tempered by subscriberspurchasing solutions that are deployed through the use of a mobile telephoneinstalled with our software

 

24

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application because we do not sell those devices and, therefore, do notrecognize any revenues from sales of mobile telephones. A similar temperingeffect may occur when a subscriber exceeds its initial contract period becauserecognition of deferred revenue is complete.

 

We describe the arrangements in which customerscontract directly with wireless carriers for the wireless airtime component of oursolutions as “unbundled”. Conversely, we describe arrangements in which wecontract directly with customers for the wireless airtime portion as “bundled”.The nature of our relationship with the wireless carriers dictates whether wewill be entering into a bundled or unbundled arrangement with a customer.Selection of the appropriate protocol is related primarily to optimal wireless coveragefor a specific subscriber area of operation. We have observed an increase inthe proportion of new subscribers being added on an unbundled basis, resultingin decreased revenue from such subscribers. Unbundled subscribers representedapproximately 64% and 55% of our total subscribers at March 31, 2006 and 2005,respectively. We expect that this trend will continue through the next 12 to 18months.

 

For the three months ended March 31, 2006 and 2005, hostedrevenue increased primarily as a result of an increase in the number ofsubscribers using our solutions, partially offset by a decrease in revenue persubscriber. The total number of subscribers using our solutions was approximately144,000 and 135,000 at March 31, 2006 and 2005, respectively. As of March 31,2006 and 2005, 87% and 69% of our subscribers were under long term contracts,respectively. Average monthly hosted revenue per subscription was approximately$47.87 for the three months ended March 31, 2006, down from $48.56 for the sameperiod in 2005. The decrease of $0.69 is primarily the result of newsubscribers being added utilizing an unbundled arrangement.

 

***Cost of hostedrevenue***

 

| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of hosted  revenue             |       | $                                                | 11,002     |   | 16 | % | $ | 9,524 |   |
| As a percentage  of hosted revenues |       | 52                                               | %          |   |   | 49 | % |
|                                     |            |                                                  |            |  |  |  |  |  |  |

 

Cost of hosted revenue consists of the amortization ofthe deferred cost of the in-vehicle enabling hardware devices; costs associatedwith the final assembly, testing, provision, delivery and installation ofhardware and other costs such as provisions for inventory and repair costs; andexpenses related to the delivery and support of our solutions. For the threemonths ended March 31, 2006 and 2005, cost of hosted revenue increasedprimarily as a result of increases in amortization of deferred product costs of$876,000, employee-related expenses of $647,000 and warranty and repair chargesof $702,000 offset by decreases in service delivery expenses of $632,000 and adjustmentsfor inventory obsolescence of $256,000. Cost of hosted revenue headcountincreased to 221 at March 31, 2006 from 177 at March 31, 2005. We expect costof hosted revenue to increase during the next 12 months, primarily resultingfrom headcount increases.

 

***Hosted gross margin***

 

| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted gross  margin                |       | $                                                | 9,961      |   | 0 | % | $ | 9,966 |   |
| As a percentage  of hosted revenues |       | 48                                               | %          |   |   | 51 | % |
|                                     |            |                                                  |            |  |  |  |  |  |  |

 

For the three months ended March 31, 2006, hosted grossmargins decreased due to the loss of Verizon as a customer with a fixed costbase combined with higher warranty and repair costs on our continuing customers.

 

Direct expenses generally increase at a rateproportional to the growth in our subscribers. Personnel costs and depreciationexpense generally increase at a rate slower than the growth rate of oursubscribers. As a result, we expect that our hosted gross margin will increaseduring the next 12 months.

 

25

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***Licensed revenue,cost of licensed revenue and licensed gross margin***

 

Licensed gross margin is calculated as follows:

 

| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Licensed revenue                                                              |       | $                                                | 3,782      |   | $ | 502 |   |
|                                                                          |       |                                             |       |   |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 1,230                                            |       | 700 |   |
| Intangibles  amortization                                                     |       | 1,010                                            |       | 457 |   |
|                                                                          |       |                                             |       |   |   |
| Total cost of  licensed revenue                                               |       | 2,240                                            |       | 1,157 |   |
|                                                                          |       |                                             |       |   |   |
| Licensed gross  margin                                                        |       | $                                                | 1,542      |   | $ | (655 | ) |
|                                                                          |       |                                             |       |   |   |
| Licensed gross  margin percentage                                             |       | 41                                               | %          | (130 | )% |

 

***Licensed revenue***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed revenue                   |       | $                                                | 3,782      |   | 653 | % | $ | 502 |   |
| As a percentage  of total revenues |       | 15                                               | %          |   |   | 3 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Licensed revenue is comprised of license fees, installation,training and PCS service fees relating to our FSM solution, acquired inconnection with our acquisition of Vidus in February 2005. The number oflicensed users of our FSM solution totaled approximately 32,000 and 25,000 atMarch 31, 2006 and 2005, respectively.

 

***Cost of licensedrevenue (excluding intangibles amortization)***

 

| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of licensed  revenue (excluding intangibles amortization) |       | $                                                | 1,230      |   | 76 | % | $ | 700 |   |
| As a percentage  of licensed revenues                          |       | 33                                               | %          |   |   | 139 | % |
|                                                                |            |                                                  |            |  |  |  |  |  |  |

 

Cost of licensed revenue (excluding intangiblesamortization) consists of employee related expenses in relation to installationservices and the support of our ongoing PCS commitments. We expect the cost oflicensed revenue to increase over the next twelve months as headcount increasesand we continue to invest in fixed assets and infrastructure to support thissegment.

 

***Licensed gross margin***

 

| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed gross  margin                |       | $                                                | 1,542      |   | 335 | % | $ | (655 | ) |
| As a percentage  of licensed revenues |       | 41                                               | %          |   |   | (130 | )% |
|                                       |            |                                                  |            |  |  |  |  |  |  |

 

Licensed gross margin was 41% and (130)% for the threemonths ended March 31, 2006 and 2005, respectively. Direct expenses generallyincrease at a rate proportional to the growth in our end users. Personnel costsand depreciation expenses generally increase at a rate slower than the growthrate of our end users. We expect our licensed gross margin to increase duringthe next twelve months.

 

***Intangiblesamortization***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangibles  amortization          |       | $                                                | 1,010      |   | 121 | % | $ | 457 |   |
| As a percentage  of total revenues |       | 4                                                | %          |   |   | 2 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

For the three months ended March 31, 2006 and 2005,intangibles amortization related to the intangible assets acquired inconnection with the purchase of Vidus in February 2005. These costs are beingamortized over their estimated useful lives of three to ten years.

 

26

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Amortization of intangible assets is expected to be$4.0 million in 2006 and 2007, after which it is expected to decrease as theintangible assets become fully amortized.

 

***In-process researchand development***

 

| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| In-process  research and development |       | $                                                | —     |   | (100 | )% | $ | 5,640 |   |
| As a percentage  of total revenues   |       | 0                                                | %          |   |   | 28 | % |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

For the three months ended March 31, 2005, in-processresearch and development consisted of research projects undertaken by Vidusprior to its acquisition by us that had not reached technological feasibilityand had no alternative future use at the time of the acquisition of Vidus. Inorder to achieve technological feasibility, we estimated the time required tocomplete the projects to cost approximately $5.7 million. We estimated the fairvalue assigned to in-process research and development using the incomeapproach, which discounts to present value the cash flows expected to beattributable to the technology once it reaches technological feasibility usinga discount rate of 40%. The stages of completion were determined by estimatingthe costs and time incurred to date relative to the costs and time expected tobe incurred to develop the in-process technology into a commercially viable technologyor product, while considering the relative difficulty of completing the varioustasks and overcoming the obstacles necessary to attain technologicalfeasibility. The weighted average stage of completion for all projects, in theaggregate, was approximately 80% as of the acquisition date. Cash flows fromsales of products incorporating those technologies commenced in 2005. In 2005,expenditures to complete the acquired in-process research and developmentapproximated the original estimates.

 

***Sales and marketing***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing               |       | $                                                | 5,918      |   | 27 | % | $ | 4,647 |   |
| As a percentage  of total revenues |       | 24                                               | %          |   |   | 23 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Sales and marketing expenses consist of employeesalaries, sales commissions, marketing and promotional expenses. For the threemonths ended March 31, 2006 and 2005, sales and marketing expenses increased primarilyas a result of increases in employee-related expenses of $933,000 and employeestock-based compensation of $255,000 as a result of the adoption of SFAS 123R. Theincrease in employee compensation expense was associated with an increase inthe average headcount. Sales and marketing headcount increased to 127 March 31,2006 from 125 at March 31, 2005. We anticipate that sales and marketingexpenses will increase in future periods as we expand our sales and marketingefforts including, but not limited to, headcount growth and promotionalexpenses related to new solutions.

 

***Research anddevelopment***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development          |       | $                                                | 3,669      |   | 42 | % | $ | 2,575 |   |
| As a percentage  of total revenues |       | 15                                               | %          |   |   | 13 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Research and development expenses consist of employeesalaries and expenses related to development personnel and consultants, as wellas expenses associated with software and hardware development. For the threemonths ended March 31, 2006 and 2005, research and development expenses increasedprimarily as a result of increases in employee-related expenses of $697,000 andemployee stock-based compensation of $174,000 as a result of the adoption ofSFAS 123R. Research and development headcount increased to 148 at March 31, 2006from 131 at March 31, 2005. We anticipate that research and developmentexpenses will increase in future periods as we develop and introduce new solutionsand as a result of increases in employee-related expenses associated with thoseintroductions.

 

27

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***General andadministrative***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative        |       | $                                                | 4,942      |   | 11 | % | $ | 4,447 |   |
| As a percentage  of total revenues |       | 20                                               | %          |   |   | 22 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

General and administrative expenses consist ofemployee salaries and related expenses for executive and administrative costs,accounting and professional fees, recruiting costs and allowance for doubtfulaccounts. For the three months ended March 31, 2006 and 2005, general andadministrative expenses increased primarily as a result of increases inemployee-related expenses of $347,000 and employee stock-based compensation of $388,000as a result of the adoption of SFAS 123R, offset by a decrease in consultingfees and temporary employee-related expenses of $347,000 relating to ourSarbanes-Oxley compliance effort. General and administrative headcountincreased to 91 at March 31, 2006 from 80 at March 31, 2005. We expect thatgeneral and administrative expenses will remain relatively flat in futureperiods.

 

The allowance for doubtful accounts was $373,000 and $1.2million as of March 31, 2006 and 2005, respectively. The decrease in theallowance is primarily due to non-recurring favorable adjustments as a resultof improvements in the collection history in our customer base that occurredduring 2005. We anticipate that the allowance for doubtful accounts will remainrelatively stable in future periods.

 

***Stock-based compensation***

 

On January 1, 2006, we adopted SFAS 123R on a modifiedprospective basis, which requires the application of the accounting standard toall share-based awards issued on or after January 1, 2006 and any outstandingshare-based awards that were issued in prior years but not vested as of January1, 2006, as adjusted for estimated forfeitures. The following table indicatesthe impact of SFAS 123R on our statement of operations for the three monthsended March 31, 2006.

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  compensation:         |       |                                             |       |   |   |   |   |
| Cost of hosted  revenues           |       | $                                                | 85         |   | 100 | % | $ | — |   |
| Cost of licensed  revenues         |       | 27                                               |       | 100 | % | — |   |
| Sales and  marketing               |       | 255                                              |       | 100 | % | — |   |
| Research and  development          |       | 174                                              |       | 100 | % | — |   |
| General and  administrative        |       | 388                                              |       | 100 | % | — |   |
| Total  stock-based compensation    |       | $                                                | 929        |   |   |   | $ | — |   |
| As a percentage  of total revenues |       | 4                                                | %          |   |   | 0 | % |

 

Stock-basedcompensation expense includes the amortization of the fair value of share-basedpayments made to employees and the Board of Directors, primarily in the form ofstock options and purchases under the employee stock purchase plan as weadopted the provisions of SFAS 123R effective January 1, 2006. The fair valueof the award is computed using the Black-Scholes model and is recognized asexpense over the employee’s requisite service period (generally over thevesting period of the award). Prior to the adoption of SFAS 123R, we previouslyapplied Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), andprovided the required pro forma disclosures of Statement of FinancialAccounting Standards No. 123, *Share-BasedPayment* (“SFAS 123”).

 

During the three monthsended March 31, 2006, we recorded stock-based compensation related to stockoptions of $799,000 and related to the employee stock purchase plan of $130,000,respectively. There were no shares purchased under the employee stock purchaseplan during the three months ended March 31, 2006.

 

On October 27, 2005,we accelerated the vesting of 811,110 stock options with exercise pricesranging from $6.40 to $14.58, being priced above the closing stock price onsuch date.  We recognized pro forma compensation expense related to thisacceleration of $5.0 million for the three months ended December 31,2005. The accelerated vesting of these stock options is expected to reduce thecompensation expense associated with these options in future periods resultingfrom the adoption of SFAS 123R.

 

As of March 31, 2006, theunrecorded deferred stock-based compensation balance related to stock optionswas $5.2 million and will be recognized over an estimated weighted average amortizationperiod of 2.6 years. Stock-based compensation of $1,000 was capitalized asinventory at March 31, 2006. For the three months ending June 30, 2006, weexpect our stock compensation expense to increase when compared with ourresults for the three months ended March 31, 2006 due to the grant of newoptions.

 

28

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***Other income (expense),net***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **2006**                          | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Interest income                    |       | $                                 | 1,036      |   | 68 | % | $ | 618 |   |
| Derivative  instrument expense     |       | (1,151                            | )          | (55 | )% | (741 | ) |
| Other (expense)  income, net       |       | (17                               | )          | (950 | )% | 2 |   |
| Total other  (expense) income, net |       | $                                 | (132       | ) | (9 | )% | $ | (121 | ) |
| As a percentage  of total revenues |       | (1                                | )%         |   |   | 1 | % |

 

For the three months ended March 31, 2006 and 2005,total other expense, net increased primarily due to larger invested balancesand higher rates of return. During the three months ended March 31, 2006 and2005, we also recorded an expense of $1.2 million and $741,000, respectively,in relation to a derivative instrument embedded in the redeemable preferredstock issued as part of the Vidus acquisition. Other (expense) income, netconsisted primarily of immaterial net foreign currency exchange losses andgains resulting from transactions with our wholly-owned subsidiaries in Indiaand in the United Kingdom. We conduct operations primarily within the UnitedStates where inflation during the three months ended March 31, 2006 and 2005has been low and has not materially impacted our operating results. Foreigncurrency exchange gains were expensed as incurred.

 

***Benefit from incometaxes***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit from  income taxes         |       | $                                                | 590        |   | 100 | % | $ | — |   |
| As a percentage  of total revenues |       | 2                                                | %          |   |   | 0 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

The benefit from income taxes for the three monthsended March 31, 2006 was calculated using an annual projected effective yearlytax rate of approximately 19%. For the three months ended March 31, 2006, wehave recorded a benefit for income taxes principally due to current periodlosses. No benefit from income taxes was provided during the three months endedMarch 31, 2005 as we maintained a full valuation allowance.

 

We currently believe that our fiscal 2006 effectivetax rate will be approximately 19 percent. This effective tax rate differs fromthe statutory rate primarily due to the projected effects of non-deductiblestock compensation, non-deductible changes in the value of the derivativeembedded in the preferred stock issued in connection with the Vidusacquisition, and the tax rate differential on foreign losses, which ispartially offset by projected tax exempt interest. It is based on the projectedmix of full-year income in each tax jurisdiction in which we operate and therelated income tax expense in each jurisdiction. Actual results could vary fromthose projected. The tax expenses or benefits for significant unusual items ortax exposure items are treated as discrete items in the interim period in whichthe events occur.

 

***Preferred stockdividends***

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred stock  dividends         |       | $                                                | 124        |   | 118 | % | $ | 57 |   |
| As a percentage  of total revenues |       | 1                                                | %          |   |   | 0 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Preferred stock dividends consist of dividends onredeemable preferred stock issued by us in connection with the acquisition ofVidus. The holders of our preferred stock are entitled to receive dividends atthe rate of $6.50 per share annually. The dividends accrue day to day, whetheror not earned or declared, from the date of the acquisition. The dividends arepayable when and if declared by the Board of Directors or upon redemption ofthe preferred stock. Any accumulation of unpaid dividends on the preferredstock does not bear interest.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                         | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
| Net loss                                              |       | $                                                | (2,568     | ) | 68 | % | $ | (8,119 | ) |
| Non-cash charges                                      |       | 3,359                                            |       | 56 | % | 7,639 |   |
| Change in  working capital assets and liabilities     |       | (3,434                                           | )          | (480 | )% | (592 | ) |
| Net cash used in  operating activities                |       | (2,643                                           | )          | (147 | )% | (1,072 | ) |
| Net cash  provided by investing activities            |       | 852                                              |       | 96 | % | 22,163 |   |
| Net cash  provided by financing activities            |       | 195                                              |       | (13 | )% | 173 |   |
| Net (decrease)  increase in cash and cash equivalents |       | $                                                | (1,596     | ) | 108 | % | $ | 21,264 |   |

 

29

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As of March 31, 2006, we had $24.2 million of cash andcash equivalents and $76.0 million of short-term investments. Working capitalwas $106.4 million.

 

For the three months ended March 31, 2006, net cashused in operating activities increased $1.6 million to $2.6 million from thesame period in 2005. The results in 2006 are primarily due to non-cash chargesfor depreciation and amortization and a change in derivative instrumentliability, partially offset by benefit from income taxes. The results for thesame period in 2005 are primarily due to non-cash charges for in-processresearch and development, depreciation and amortization, a change in derivativeinstrument liability and the provision for doubtful accounts and sales returns.In addition, the operating cash flows for 2006 and 2005 were also negativelyimpacted by the year-over-year changes in working capital assets andliabilities.

 

For the three months ended March 31, 2006, the netcash provided by investing activities was comprised of $18.2 million inproceeds from the sale of short-term investments, partially offset by $16.6million used to purchase short-term investments and $795,000 used to purchaseproperty and equipment. For the three months ended March 31, 2005, the net cashprovided by investing activities was comprised of $63.4 million in proceedsfrom the sale of short-term investments, partially offset by $35.1 million usedto purchase short-term investments, $5.2 million used for the acquisition ofVidus, net of cash acquired and $848,000 million used to purchase property andequipment. Purchases of property and equipment related mainly to purchases ofcomputer equipment and software to support our growth in operations,infrastructure and headcount. We currently do not have any material commitmentsfor capital expenditures, although we anticipate increases in capitalexpenditures and lease commitments with our expected growth in operations andinfrastructure over the next twelve months. We also may establish additionaloperations as we expand globally.

 

The net cash flows provided by financing activities forthe three months ended March 31, 2006 and 2005 were due primarily to proceedsfrom the exercise of stock options and purchases of common stock under ouremployee stock purchase plan. Proceeds from the sale of our common stocktotaled $194,000 and $172,000 for the three months ended March 31, 2006 and 2005,respectively.

 

We believe that existing cash, cash equivalents andshort-term investments, together with any cash generated from operations, willbe sufficient to fund our operating activities, capital expenditures and otherobligations for at least the next twelve months.

 

***Commitments andContingencies***

 

We have certain fixed contractual obligations andcommitments that include future estimated payments. Changes in our businessneeds, cancellation provisions, changing interest rates, and other factors mayresult in actual payments differing from the estimates. We cannot providecertainty regarding the timing and amounts of all payments. We have presentedbelow, a summary of the most significant assumptions used in our determinationof amounts presented in the tables in order to assist in the review of thisinformation within the context of our consolidated financial position, resultsof operations and cash flows. The following table summarizes our fixedcontractual obligations as of March 31, 2006 (in thousands):

 
| ** **                         | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|------------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating lease  obligations(1)    |       | $         | 7,028      |                            | $          | 2,052              |       | $                  | 4,786      |                             | $          | 190 |   | $ | — |   |
| Capital lease  obligations(2)      |       | 85        |       | 63                              |       | 22                 |       | —             |       | —                           |       |
| Financing lease  obligations(2)    |       | 7         |       | 7                               |       | —             |       | —             |       | —                           |       |
| Other purchase  obligations(3)     |       | 4,375     |       | 4,375                           |       | —             |       | —             |       | —                           |       |
| Inventory  purchase obligations(4) |       | 6,615     |       | 6,615                           |       | —             |       | —             |       | —                           |       |
|                               |       | $         | 18,110     |                            | $          | 13,112             |       | $                  | 4,808      |                             | $          | 190 |   | $ | — |   |

 

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(1) Operating lease commitments include minimum rental payments underour non-cancelable operating leases for office facilities, as well as limitedoffice equipment that we utilize under lease arrangements. The amountspresented are consistent with contractual terms and are not expected to differsignificantly unless a substantial change in our headcount needs requires us toexit an office facility early or expand our occupied space.

 

(2) Capital lease obligations and financing lease obligations areincluded in the balance sheet under property, plant and equipment, net andprimarily include minimum rental payments under our non-cancelable leases foroffice equipment and furniture.

 

(3) Other purchase obligation amounts include minimum purchasecommitments for marketing, computer equipment, software applications,engineering development services and other goods and services that were enteredinto in the ordinary course of business. Purchase obligations includeagreements that are cancelable without penalty. Certain of these contractualarrangements contain significant performance requirements. Given thesignificance of the performance requirements, actual payments could differsignificantly from these estimates.

 

(4) Inventory purchase commitments include minimum payments undernon-cancelable commitments for goods that were entered into in the ordinarycourse of business.

 

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Excluded from the table above is the fair value of a derivativeinstrument for which the ultimate settlement amount is not yet known and thatis payable only upon redemption of the outstanding redeemable preferred stockto which it relates. See “Item 3—Quantitative and Qualitative Disclosures AboutMarket Risk” for further discussion.

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2006, we had no off-balance sheetarrangements that have had, or are reasonably likely to have, a current orfuture material effect on our consolidated financial condition, results ofoperations, liquidity, capital expenditures or capital resources.

 

**Impact of Recently Issued Accounting Pronouncements**

 

In November 2005, the Financial Accounting StandardsBoard (“FASB”) issued FASB Staff Position (“FSP”) Nos. SFAS 115-1 and SFAS124-1, *The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments*. This FSPaddresses the determination as to when an investment is considered impaired,whether that impairment is other than temporary and the measurement of animpairment loss. This FSP also includes accounting considerations subsequent tothe recognition of other-than-temporary impairments. The adoption of the FSPdid not have a material impact on our consolidated statement of operations andfinancial condition.

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(revised 2004),*Share-Based Payment*(“SFAS 123R”), that addresses the accounting for stock-based payment transactionsin which an enterprise receives employee services in exchange for either equityinstruments of the enterprise or liabilities that are based on the fair valueof the enterprise’s equity instruments or that may be settled by the issuanceof such equity instruments. The statement eliminates the ability to account forstock-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB25”), and generally requires that such transactions be accounted for using afair value based method and recognized as expense in the consolidated statementof operations. SFAS 123R also requires additional accounting for the taxbenefit on employee stock options and for stock issued under our employee stockpurchase plan. The adoption of SFAS 123R on January 1, 2006, had a materialimpact on our consolidated results of operations and financial position. SeeNote 9 – Stock Based Compensation in the Notes to Condensed ConsolidatedFinancial Statements for additional disclosure related to FAS 123R.

 

On June 7, 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3,Reporting Accounting Changes in Interim Financial Statements*(“SFAS154”). SFAS 154 changes the requirements for accounting and reporting a changein accounting principle. Previously, most voluntary changes in accountingprinciples were required to be recognized by way of a cumulative effectadjustment within net income during the period of the change. SFAS 154 requiresretrospective application to prior periods’ financial statements, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 is effective for accounting changes made infiscal years beginning after December 15, 2005; however, SFAS 154 does notchange the transition provisions of any existing accounting pronouncements.

 

In November 2004, the FASB issued SFAS No. 151, *Inventory Costs, an amendment of APB No. 43, Chapter4*(“SFAS 151”). SFAS 151 clarifies that abnormal inventory costssuch as the costs of idle facilities, excess freight and handling costs, andwasted materials (spoilage) are required to be recognized as current periodcharges. The provisions of SFAS 151 are effective for fiscal years beginningafter July 1, 2005. The adoption of SFAS 151 did not have a material impact onour consolidated statement of operations and financial condition.

 

**FACTORS THAT COULD AFFECT FUTURERESULTS**

 

In addition to the otherinformation contained in this Quarterly Report on Form 10-Q, the followingfactors should be carefully considered in evaluating our business andprospects. The risks and uncertainties described below are intended to be onesthat are specific to us or our industry and that we deem material, but they arenot the only ones that we face.

 

**OnFebruary 18, 2005, we acquired Vidus. The combined company may not realizeexpected benefits because of integration and other challenges.**

 

If thecombined company fails to meet the challenges involved in integratingoperations and products successfully or otherwise fails to realize any of theanticipated benefits of the acquisition, then the results of operations of thecombined company could be seriously harmed. Realizing the benefits of theacquisition, if any, will depend in part on the successful integration oftechnology, operations and personnel. The integration of the companies is acomplex, time-consuming and expensive process that could significantly disruptthe business of the combined company.

 

Thecombined company may not successfully integrate the operations of @Road andVidus in a timely manner, or at all, and the combined company may not realizethe anticipated benefits of the acquisition to the extent, or in the timeframe,anticipated. The anticipated benefits of the acquisition are based onprojections and assumptions, including successful integration, not actual experience.In addition to the integration risks discussed above, the combined company’sability to realize those benefits could be adversely affected by practical orlegal constraints on its ability to combine operations.

 

**Ifthe value of Vidus’ goodwill and or intangibles becomes impaired, we may berequired to incur significant costs that would adversely affect our financialresults.**

 

Underthe purchase method of accounting, the combined company allocated the totalestimated purchase price of $46.3 million to Vidus’ tangible assets, purchasedtechnology and other intangible assets and liabilities assumed based on theirfair values as of the date of completion of the acquisition, and recorded theexcess of the purchase price over those fair values as goodwill. The combinedcompany will incur amortization expense over the useful lives of amortizableintangible assets acquired in connection with the acquisition. In addition, tothe extent the value of goodwill and or intangibles becomes impaired, thecombined company may be required to incur material charges relating to theimpairment of these assets. Any potential impairment charge could have amaterial impact on the combined company’s results of operations and could havea material adverse effect on the market value of our common stock.

 

**Ifwireless communications providers on which we depend for services decide toadopt new wireless technologies, or abandon or do not continue to expand theirwireless networks, our operations may be disrupted, we may lose customers andour revenues could decrease.**

 

        Currently, oursolutions function on general packet radio service (“GPRS”), code divisionmultiple access (“CDMA”) 1XRTT, evolution-data optimized (“EvDO”), integrateddigital enhanced network (“iDEN”) and enhanced data rates for GSM evolution(“EDGE”) networks. These protocols cover only portions of the United States,Europe and Canada. In the first quarter of 2006, we completed a costly and timeconsuming migration from CDPD to the protocols set forth above after wirelesscommunications providers abandoned their CDPD networks in favor of newertechnologies. If wireless communications providers abandon the protocols uponwhich our solutions now function in favor of other types of wirelesstechnology, we may not be able to provide services to our customers, or we maybe forced to incur considerable costs in order to adapt our solutions to newprotocols. In addition, if cellular carriers do not expand their coverageareas, we will be unable to meet the needs of customers who may wish to use ourservices outside the current cellular coverage area.

 

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**Anymaterial weakness or significant deficiency identified in our internal controlscould have an adverse effect on our business.**

 

Section 404of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and reporton their internal control structure and procedures for financial reporting. Aspart of our first quarter 2005 and fourth quarter 2005 closing processes and assessmentsof internal control over our financial reporting, we identified two internalcontrol deficiencies that constituted material weaknesses. The first materialweakness concerned our interpretation and implementation of various complexaccounting principles in the area of non-recurring transactions, and the secondconcerned our calculation and timely review of the annual tax provision for2005. These material weaknesses were not fully remediated as of March 31, 2006.Please see Item 4 “Controls and Procedures” of this Quarterly Report on Form10-Q and Item 9A “Controls and Procedures” in Part II of our Annual Report onForm 10-K for the year ended December 31, 2005 for additional information.There can be no assurance that there will not be other significant deficienciesor material weaknesses that would be required to be reported in the future. Inaddition, we expect the evaluation process and any required remediation, ifapplicable, will increase our accounting, legal and other costs, and may divertmanagement resources from other business objectives and concerns.

 

**Ourstock price is volatile, which may cause you to lose money and could lead tocostly litigation against us that could divert our resources.**

 

Fromtime to time, stock markets experience dramatic price and volume fluctuations,particularly for shares of technology companies. These fluctuations can beunrelated to the operating performance of these companies. Broad marketfluctuations may reduce the market price of our common stock and cause you tolose some or all of your investment. These fluctuations may be exaggerated ifthe trading volume of our common stock is low. In addition, due to thetechnology-intensive nature and growth rate of our business and the MRM market,the market price of our common stock may rise and fall in response to:

 

•      quarterly variations in operating results;

 

•      failure to achieve operating results anticipated bysecurities analysts and investors;

 

•      changes in estimates of our financial performance orchanges in recommendations by securities analysts;

 

•      announcements of technological or competitivedevelopments;

 

•      the gain or loss of a significant customer or order;

 

•      disposition of shares of our common stock held bylarge investors; and

 

•      acquisitions or strategic alliances by us or ourcompetitors.

 

Whenthe market price of a company’s stock drops significantly, stockholders ofteninstitute securities class action lawsuits against that company. A lawsuitagainst us could cause us to incur substantial costs and could divert the timeand attention of our management and other resources from our business.

 

**Weface competition from internal development teams of potential customers andfrom existing and potential competitors, and if we fail to compete effectively,our ability to acquire new customers could decrease, our revenues would declineand our business would suffer.**

 

Themarket for MRM solutions is competitive and is expected to become even morecompetitive in the future. If we do not compete effectively, competition couldharm our business and limit our ability to acquire new customers and growrevenues, which in turn could result in a loss of our market share and declinein revenues. We believe that our solutions face competition from a number ofbusiness productivity solutions, including:

 

•      solutions developed internally by our prospectivecustomers’ information technology staff, particularly by large customerprospects;

 

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•      discrete means of communication with mobile workers,such as pagers, two-way radios, handheld devices and cellular telephones;

•      solutions targeted at specific vertical markets, suchas a service offered by Qualcomm that monitors assets in the long-haultransportation sector;

•      solutions designed to help companies schedule androute their mobile workers; and

•      solutions offered by smaller market entrants, many ofwhich are privately held and operate on a regional basis.

 

Inaddition, we believe that our solutions face competition from manufacturingcompanies that seek to enter the mobile resource management market, such asTrimble Navigation.

 

We mayalso face competition from our current and potential alliances, such aswireless carriers, that may develop their own solutions, develop solutions withcaptive and other suppliers or support the marketing of solutions of othercompetitors.

 

Wealso face numerous challenges associated with overcoming the followingcompetitive factors:

 

•      *Size and resources.  *Many of our current and potential competitorshave access to substantially greater financial, marketing, distribution,engineering and manufacturing resources than we do, which may enable them toreact more effectively to new market opportunities and customer requirements.Furthermore, these competitors may be able to adopt more aggressive pricingpolicies and offer more attractive terms than we can.

 

•      *Name recognition.  *Many of our current and potentialcompetitors have greater name recognition and market presence than we do, whichmay allow them to more effectively market and sell solutions to our current andpotential customers.

 

•      *Limits of product and serviceofferings.  *Although we offer a broad range of mobile resource managementsolutions, a customer prospect may require functionality that we do not offer,which may enable current and potential competitors to exploit the areas inwhich we do not develop solutions.

 

•      *Customer relationships.  *Many of our current and potentialcompetitors have pre-existing relationships with our large customer prospects,which may allow them to more effectively market and sell competitive MRMsolutions.

 

**Aswe seek to serve larger customers, we face competition from businesses withgreater financial resources, and we may be unable to compete effectively withthese businesses.**

 

Theexisting market is competitive. Competition is particularly vigorous for largercustomers, which is a customer segment we have worked to serve. We expectcompetition to increase further as companies develop new products and/or modifytheir existing products to compete directly with ours. In addition, competitorsmay reduce prices to customers and seek to obtain our customers throughcost-cutting and other measures. To the extent these companies competeeffectively with us, our business could be adversely affected by extended salescycles, fewer sales, and lower prices, revenue and margins.

 

**Underthe terms of our customer contracts for our hosted solutions, once the contractperiod expires, a customer may terminate our services with little or no notice.**

 

Ourcustomer contracts for our hosted solutions typically provide for a contractperiod of one, two or three years. Under the terms of a typical contract, acustomer will often be subject to a termination fee if it chooses to terminatethe contract before the contract period expires. Once the contract period hasexpired, and unless a customer has executed a new contract, the terms of thecontract will remain in force on a month-to-month basis, allowing the customerto terminate the contract by giving very short notice and without incurring anytermination fee. The termination of a significant number of customer contractsor

 

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customer contracts providing a material portion of ourrevenues, could cause our business to suffer and adversely affect our financialresults.

 

**Ourbusiness is subject to the risks associated with international operations.**

 

Werecently began offering our products and services in the United Kingdom andEurope, and we have operations in India. A significant portion of our revenueis derived from our international operations. We have limited experienceoperating in these foreign jurisdictions. As a result, our operating resultsand financial condition could be significantly affected by risks associatedwith international activities, including economic and labor conditions,political instability, tax laws (including United States taxes on foreignsubsidiaries), the enactment of new laws affecting our activities, governmentregulation of our activities, and changes in the value of the United Statesdollar relative to the local currency in which our products are sold and ourgoods and services are purchased.

 

**Ourquarterly operating results are subject to fluctuations, and our stock pricemay decline if we do not meet the expectations of investors and analysts.**

 

Ourquarterly revenues and operating results are difficult to predict and mayfluctuate significantly from quarter to quarter due to a number of factors,many of which are outside our control. These factors include, but are notlimited to:

 

•      changes in the market for MRM solutions;

 

•      delays in market acceptance or implementation of oursolutions by customers;

 

•      changes in length of sales cycles of, or demand by,our customers for existing and additional solutions;

 

•      changes in the productivity of our distributionchannels;

 

•      introduction of new solutions by us or ourcompetitors;

 

•      changes in our pricing policies or those of ourcompetitors or suppliers;

 

•      changes in our mix of sources of revenues;

 

•      general economic and political conditions;

 

•      wireless networks, positioning systems and Internetinfrastructure owned and controlled by others; and

 

•      any need to migrate to new wireless networks, whichcould cause our solutions to be incompatible with new wireless networks orbecome out of date.

 

Ourexpense levels are based, in part, on our expectation of future revenues.Additionally, a substantial portion of our expenses is relatively fixed. As aresult, any shortfall in revenues relative to our expectations could causesignificant changes in our operating results from quarter to quarter. Webelieve period-to-period comparisons of our revenue levels and operatingresults are not meaningful. You should not rely on our quarterly revenues andoperating results to predict our future performance. Our operating results havebeen, and in some future quarters our operating results may be, below theexpectations of public market analysts and investors and, as a result, theprice of our common stock may fall.

 

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**Oursuccess depends upon our ability to develop new solutions and enhance ourexisting solutions. If we cannot deliver the features and functionality ourcustomers demand, we will be unable to retain or attract new customers.**

 

If weare unable to develop new solutions, are unable to enhance and improve oursolutions successfully in a timely manner, or fail to position and/or price oursolutions to meet market demand, we may not attract new customers, existingcustomers may not expand their use of our solutions, and our business andoperating results will be adversely affected. If our enhancements to existingsolutions do not deliver the functionality that our customer base demands, ourcustomers may choose not to renew their agreements with us when they reach theend of their initial contract periods, and our business and operating resultswill be adversely affected. If we cannot effectively deploy, maintain and enhanceour solutions, our revenues may decrease, we may not be able to recover ourcosts, and our competitive position may be harmed.

 

**Ifone or more of the agreements we have with wireless communications providers isterminated and as a result, we are unable to offer our solutions to customerswithin a wireless communications provider’s coverage area, we may be unable todeliver our solutions, we may lose customers, and our revenues could decrease.**

 

Ourexisting agreements with wireless communications providers may, in some casesbe terminated immediately upon the occurrence of certain conditions or withprior written notice. If one or more of our wireless communications providersdecides to terminate or not to renew its contract with us, we may incur additionalcosts relating to obtaining alternate coverage from another wirelesscommunications provider outside of its primary coverage area, or we may beunable to replace the coverage at all, causing a complete loss of services toour customers in that coverage area.

 

**Wehave a history of losses, have only recently become profitable and may notsustain or increase profitability in the future.**

 

Wehave only recently become profitable and may not sustain or increaseprofitability in the future. As of March 31, 2006, we had an accumulateddeficit of approximately $81.0 million. To sustain profitability, we will needto generate significant revenues to offset our cost of revenues and our salesand marketing, research and development and general and administrative expenses.We may not achieve or sustain our revenue or profit goals and may incur lossesin the future. Changes such as increases in our pricing for solutions or thepricing of competing solutions may harm our ability to increase sales of oursolutions to new and existing customers. If we are not able to expand ourcustomer base and increase our revenue from new and existing customers, we maybe unprofitable.

 

**Wemay establish alliances or acquire technologies or companies in the future,which could result in the dilution of our stockholders and disruption of ourbusiness, which could reduce our revenues or increase our costs.**

 

We arecontinually evaluating business alliances and external investments intechnologies related to our business. Acquisitions of companies, divisions ofcompanies, businesses or products and strategic alliances entail numerousrisks, any of which could materially harm our business in several ways,including:

 

•      diversion of management’s attention from our corebusiness objectives and other business concerns;

 

•      failure to integrate efficiently businesses ortechnologies acquired in the future with our pre-existing business ortechnologies;

 

•      potential loss of key employees from either ourpre-existing business or the acquired business;

 

•      dilution of our existing stockholders as a result ofissuing equity securities; and

 

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•      assumption of liabilities of the acquired company.

 

Someor all of these problems may result from current or future alliances,acquisitions or investments. Furthermore, we may not realize any value fromthese alliances, acquisitions or investments.

 

**Wedepend on a limited number of third parties to manufacture and supply certaincomponents of our solutions.**

 

Werely on a limited number of sole suppliers for certain components of oursolutions. We do not have long-term agreements with these suppliers. If theseparties do not perform their obligations, or if they cease to supply thecomponents needed for our solutions, we may be unable to find other suppliersand our business would be seriously harmed. We cannot be sure that alternativesources for these components will be available when needed, or if available,that these components will be available on commercially reasonable terms. Thesesole suppliers include Motorola, which supplies microcontrollers for use in ourInternet Location Manager and Micronet, which supplies our *i*DT devices.

 

It isour practice to attempt to maintain no more than a three to nine month supply ofmicrocontrollers, *i*DT devices andother components and devices needed for our solutions. Although we believe thatwe have sufficient quantities of such components and devices to last the nextthree to nine months, if any of our agreements with our suppliers andmanufacturers are terminated or expire, if we are unable to obtain sufficientquantities of any products or components critical for our solutions, if thequality of these products or components is inadequate, or if the terms forsupply of these products or components become commercially unreasonable, oursearch for additional or alternate suppliers and manufacturers could result insignificant delays, added expense and our inability to maintain or expand ourcustomer base. Any of these events could require us to take unforeseen actionsor devote additional resources to provide our products and services and couldharm our ability to compete effectively.

 

**Adisruption of our services or of our software applications due to accidental orintentional security breaches may harm our reputation, cause a loss of revenuesand increase our expenses.**

 

Unauthorizedaccess, computer viruses and other accidental or intentional actions coulddisrupt our information systems or communications networks or could adverselyimpact the functionality and security of our software products. We expect toincur significant costs to protect against the threat of security breaches andto alleviate problems caused by any breaches. Currently, the wirelesstransmission of our customers’ proprietary information is not protected byencryption technology. If a third party were to misappropriate our customers’proprietary information or adversely impact the operations of our customers, wecould be subject to claims, litigation or other potential liabilities thatcould seriously harm our revenues and result in the loss of customers.

 

**Systemor network failures could reduce our sales, increase costs or result inliability claims.**

 

Anydisruption to our services, information systems or communications networks orthose of third parties could result in the inability of our customers toreceive our services for an indeterminate period of time. Our hosted solutionsand related operations depend upon our ability to maintain and protect ourcomputer systems at data centers located in Ashburn, Virginia and Redwood City,California, and our network operations center in Fremont, California. Thefacilities in California are in or near earthquake fault zones. Our servicesmay not function properly and we may not be able to adequately support andmaintain our software products if our systems fail, if there is an interruptionin the supply of power, or if there is an earthquake, fire, flood or othernatural disaster, or an act of war or terrorism. Within each of our datacenters, we have fully redundant systems; however, in the event of a system ornetwork failure, the process of shifting access to customer data from one datacenter to the other would be performed manually, and could result in a furtherdisruption to our services and our ability to adequately support and maintainour software products. Any disruption to our services could cause us to losecustomers or revenue, or face litigation, customer service or repair work thatwould involve substantial costs and could distract management from operatingour business.

 

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**Oursuccess and ability to compete depend upon our ability to secure and protectpatents, trademarks and other proprietary rights.**

 

Oursuccess and ability to compete depend on our ability to protect our proprietaryrights to the technologies used to implement and operate our solutions in theUnited States, the United Kingdom and in other countries. In the event that athird party breaches the confidentiality provisions or other obligations in oneor more of our agreements or misappropriates or infringes our intellectualproperty rights or the intellectual property rights licensed to us by thirdparties, our business could be seriously harmed. To protect our proprietaryrights, we rely on a combination of trade secrets, confidentiality and othercontractual provisions and agreements, and patent, copyright and trademarklaws, which afford us only limited protection. Third parties may independentlydiscover or invent competing technologies or reverse engineer our tradesecrets, software or other technology. Furthermore, laws in some foreigncountries may not protect our proprietary rights to the same extent as the lawsof the United States. Therefore, the measures we take to protect ourproprietary rights may not be adequate.

 

**Claimsthat we infringe third-party proprietary rights could result in significantexpenses or restrictions on our ability to provide our solutions.**

 

Thirdparties may claim that our current or future solutions infringe theirproprietary rights or assert other claims against us. As the number of entrantsinto our market increases, the possibility of an intellectual property or otherclaim against us grows. Any intellectual property or other claim, with orwithout merit, would be time-consuming and expensive to litigate or settle andcould divert management’s attention from our core business. As a result of sucha dispute, we may have to pay damages, incur substantial legal fees, developcostly non-infringing technology, if possible, or enter into licenseagreements, which may not be available on terms acceptable to us, if at all.Any of these results would increase our expenses and could decrease thefunctionality of our solutions, which would make our solutions less attractiveto our current or potential customers. We have agreed in some of ouragreements, and may agree in the future, to indemnify other parties for anyexpenses or liabilities resulting from claimed infringements of the proprietaryrights of third parties.

 

**Ifour customers do not have access to sufficient capacity on reliable wirelessnetworks, we may be unable to deliver our services, our customers’ satisfactioncould decline and our revenues could decrease.**

 

Part ofour ability to grow and maintain profitability depends on the ability ofwireless carriers to provide sufficient network capacity, reliability andsecurity to our customers. Even where wireless carriers provide coverage toentire metropolitan areas, there are occasional lapses in coverage, for exampledue to tunnels blocking the transmission of data to and from wireless modemsused with our solutions. These effects could make our services less reliableand less useful, and customer satisfaction could suffer.

 

**Wedepend on GPS technology owned and controlled by others. If we do not havecontinued access to GPS technology or satellites, we will be unable to delivera majority of our solutions and revenues will decrease.**

 

Amajority of our solutions rely on signals from global positioning system(“GPS”) satellites built and maintained by the United States Department ofDefense. GPS satellites and their ground support systems are subject toelectronic and mechanical failures and sabotage. If one or more satellitesmalfunction, there could be a substantial delay before they are repaired orreplaced, if at all, our products and services may cease to function, andcustomer satisfaction would suffer.

 

Inaddition, the United States government could decide to discontinue operationand maintenance of GPS satellites or to charge for the use of GPS. Furthermore,because of ever-increasing commercial applications of GPS and internationalpolitical unrest, United States government agencies may become increasinglyinvolved in the administration or the regulation of the use of GPS signals inthe future. If

 

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factors such as theforegoing affect GPS, for example by affecting the availability, quality,accuracy or pricing of GPS technology, our business will suffer.

 

**Defectsor errors in our solutions could result in the cancellation of or delays in theimplementation of our solutions, which would damage our reputation and harm ourfinancial condition.**

 

Wemust develop our solutions quickly to keep pace with the rapidly changing MRMmarket. Solutions that address this market are likely to contain undetectederrors or defects, especially when first introduced or when new versions areintroduced. We may be forced to delay commercial releases of new solutions orupdated versions of existing solutions until such errors or defects arecorrected, and in some cases, we may need to implement enhancements to correcterrors that were not detected until after deployment of our solutions. Evenafter testing and release, our solutions may not be free from errors ordefects, which could result in the cancellation or disruption of our servicesor dissatisfaction of customers. In some cases, customers may terminate theiragreements with us without penalty if the solution we have provided does notmeet the specifications agreed upon by the parties. Such contract terminationsor customer dissatisfaction would damage our reputation and result in lostrevenues, diverted development resources, and increased support and warrantycosts.

 

**Theproduction or reporting of inaccurate information could cause the loss ofcustomers and expose us to legal liability.**

 

Theaccurate production and reporting of information is critical to our customers’businesses. If we fail to accurately produce and report information, we couldlose customers, our reputation and ability to attract new customers could beharmed, and we could be exposed to legal liability. We may not have insuranceadequate to cover losses we may incur as a result of these inaccuracies.

 

**Oursuccess depends on our ability to maintain and expand our sales channels.**

 

Toincrease our market awareness, customer base and revenues, we need to expandour direct and indirect sales operations. There is strong competition forqualified sales personnel, and we may not be able to attract or retainsufficient new sales personnel to expand our operations. New sales personnelrequire training, and it takes time for them to achieve full productivity, ifat all. In addition, we believe that our success is dependent on the expansionof our indirect distribution channels, including our relationships withwireless carriers, independent sales agents and resellers. These sales channelalliances require training in selling our solutions and it will take time forthese alliances to achieve productivity, if at all. We may not be able toestablish relationships with additional distributors on a timely basis, or atall. Our independent sales agents and resellers, many of which are not engagedwith us on an exclusive basis, may not devote adequate resources to promotingand selling our solutions.

 

**Wedepend on recruiting and retaining qualified personnel, and our inability to doso may result in a loss in sales, impair our ability to effectively manage ouroperations or impair our ability to develop and support our solutions.**

 

Becauseof the technical nature of our solutions and the market in which we compete,our success depends on the continued services of our current executive officersand our ability to attract and retain qualified personnel with expertise inwireless communications, GPS technologies, hosted software applications,transaction processing and the Internet. Competitors and others have recruitedour employees in the past and may attempt to do so in the future. In addition,new employees generally require substantial training, which requiressignificant resources and management attention. Even if we invest significantresources to recruit, train and retain qualified personnel, there can be noassurances that we will be successful in our efforts.

 

**Fromtime to time, we are or may be subject to litigation that could result insignificant costs to us.**

 

Fromtime to time, we are or may be subject to litigation in the ordinary course ofbusiness relating to any number or type of claims, including claims for damagesrelated to errors and malfunctions of our

 

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products and services or their deployment. Asecurities, product liability, breach of contract, or other claim couldseriously harm our business because of the costs of defending the lawsuit,diversion of employees’ time and attention, and potential damage to ourreputation. Some of our agreements with customers, suppliers and other thirdparties contain provisions designed to limit exposure to potential claims.Limitation of liability provisions contained in our agreements may not beenforceable under the laws of some jurisdictions. As a result, we could berequired to pay substantial amounts of damages in settlement or upon thedetermination of any of these types of claims. Although we carry generalliability and directors and officers insurance, our insurance may not coverpotential claims or may not be adequate to cover all costs incurred in defenseof potential claims or to indemnify us for all liabilities that may be imposed.

 

**Governmentregulations and standards could subject us to increased regulation, increaseour costs of operations or reduce our opportunities to earn revenue.**

 

Inaddition to regulations applicable to businesses in general, we may also besubject to direct regulation by United States governmental agencies, includingthe Federal Communications Commission, Department of Defense, Department ofCommerce or the State Department. These regulations may impose licensingrequirements, privacy safeguards relating to certain subscriber information, orsafety standards, for example with respect to human exposure to electromagneticradiation and signal leakage. A number of legislative and regulatory proposalsunder consideration by federal, state, provincial, local and foreigngovernmental organizations may lead to laws or regulations concerning variousaspects of the Internet, wireless communications and GPS technology, includingon-line content, user privacy, taxation, access charges and liability forthird-party activities. Additionally, it is uncertain how existing lawsgoverning issues such as taxation on the use of wireless networks, intellectualproperty, libel, user privacy and property ownership will be applied to oursolutions. The adoption of new laws or the application of existing laws mayexpose us to significant liabilities and additional operational requirements,which could decrease the demand for our solutions and increase our cost ofdoing business. Wireless communications providers who supply us with airtimeare subject to regulation by the Federal Communications Commission, andregulations that affect them could also increase our costs or limit our abilityto provide our solutions.

 

**Fluctuationsin the value of foreign currencies could result in decreased revenues,increased product costs and operating expenses.**

 

Wehave customers, suppliers and manufacturers that are located outside the UnitedStates. Some transactions relating to supply and development agreements may beconducted in currencies other than the United States dollar, and fluctuationsin the value of foreign currencies relative to the United States dollar couldcause us to incur currency exchange costs. In addition, some of ourtransactions denominated in United States dollars may be subject to currencyexchange rate risk. We cannot predict the effect of exchange rate fluctuationson our future operating results. Should there be a sustained increase inaverage exchange rates for the local currencies in these countries, oursuppliers and manufacturers may request a price increase at the end of thecontract period.

 

**Geopolitical,economic and military conditions, including terrorist attacks and other acts ofwar, may materially and adversely affect the markets on which our common stocktrades, the markets in which we operate, our operations and our profitability.**

 

Terroristattacks and other acts of war, and any response to them, may lead to armedhostilities and such developments would likely cause instability in financialmarkets. Armed hostilities and terrorism may directly impact our facilities,personnel and operations which are located in the United States, the UnitedKingdom and India, as well as those of our customers and suppliers.Furthermore, severe terrorist attacks or acts of war may result in temporaryhalts of commercial activity in the affected regions, and may result in reduceddemand for our solutions. These developments could have a material adverseeffect on our business and the trading price of our common stock.

 

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**Asof March 31, 2006, a limited number of stockholders own approximately 34% ofour stock and may act, or prevent certain types of corporate actions, to thedetriment of other stockholders.**

 

Ourdirectors, officers and greater than 5% stockholders own, as of March 31, 2006,approximately 34% of our outstanding common stock. Accordingly, thesestockholders may, if they act together, exercise significant influence over allmatters requiring stockholder approval, including the election of a majority ofthe directors and the determination of significant corporate actions. Thisconcentration could also have the effect of delaying or preventing a change incontrol that could otherwise be beneficial to our stockholders.

 

**Ourcertificate of incorporation and bylaws and state law contain provisions thatcould discourage a takeover.**

 

Wehave adopted a certificate of incorporation and bylaws, which in addition tostate law, may discourage, delay or prevent a merger or acquisition that astockholder may consider favorable. These provisions include the following:

 

•     establishing a classified board in which only aportion of the total board members will be elected at each annual meeting;

 

•     authorizing the board to issue preferred stock;

 

•     prohibiting cumulative voting in the election ofdirectors;

 

•     limiting the persons who may call special meetings ofstockholders;

 

•     prohibiting stockholder action by written consent; and

 

•     establishing advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted on by stockholders at stockholder meetings.

 

Wehave adopted a certificate of incorporation that permits our board to issueshares of preferred stock without stockholder approval, which means that ourboard could issue shares with special voting rights or other provisions thatcould deter a takeover. In addition to delaying or preventing an acquisition,the issuance of a substantial number of shares of preferred stock couldadversely affect the price of our common stock and dilute existingstockholders.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

**Interest rate risk**

 

We are exposed to the impact of interest rate changesand changes in the market values of our marketable securities. We have not usedderivative financial instruments in our investment portfolio. We invest ourexcess cash in debt instruments of high-quality corporate issuers and theUnited States government or its agencies. Our investment policy limits theamount of credit exposure to any one issuer and limits our investments tomaturity dates of less than one year. We are averse to principal loss and seekto preserve our invested funds by limiting default risk, market risk andreinvestment risk. We mitigate default risk by investing in high credit qualitysecurities and by positioning our portfolio to respond appropriately to asignificant reduction in a credit rating of any investment issuer or guarantor.The portfolio includes only marketable securities with active secondary orresale markets to provide portfolio liquidity.

 

Cash, cash equivalents and marketable securities inboth fixed and floating rate interest-earning instruments carry a degree ofinterest rate risk. Fixed rate securities may have their fair market valueadversely impacted due to rising interest rates, while floating rate securitiesmay produce less income than expected if interest rates fall. Due in part tothese factors, our future interest income may fall short of expectations due tochanges in interest rates or we may suffer losses if forced to sell securitiesthat have declined in market value due to changes in interest rates.

 

The table below presents the carrying value andrelated weighted average rate of return for our cash, cash equivalents and debtsecurities. The carrying values approximate fair values as of March 31, 2006and December 31, 2005. As of March 31, 2006, debt securities consisted of $24.2million with original maturity dates of 90 days or less and $76.0 million withoriginal maturity dates of greater than 90 days. As of December 31, 2005, debtsecurities consisted of $25.8 million with original maturity dates of 90 daysor less and $77.6 million with original maturity dates of greater than 90 days.

 
| ** **                                              | ** ** | **Carrying  value at  March 31,  2006** | ** ** | **Average  rate of  return at  March 31,  2006** | ** ** | **Carrying  value at  December 31,  2005** | ** ** | **Average  rate of  return at  December 31,  2005** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**                           | ** ** | **(annualized)**                                                | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                                   | ** ** |
| **Cash,  cash equivalents and marketable securities**   |       |                                              |       |                                                            |       |                                                 |       |                                                               |       |
| Cash and cash  equivalents—variable rate           |       | $                                                 | 5,543      |                                                            | 3.3        | %                                                    | $          | 8,984                                                              |       | 2.8 | % |
| Money market  funds—variable rate                  |       | 6,567                                             |       | 4.7                                                             | %          | 7,030                                                |       | 3.6                                                                | %          |
| Cash and cash  equivalents—fixed rate              |       | 12,067                                            |       | 4.7                                                             | %          | 9,759                                                |       | 4.2                                                                | %          |
|                                                    |       |                                              |       |                                                            |       |                                                 |       |                                                               |       |
| Total cash and  cash equivalents                        |       | 24,177                                            |       | 4.4                                                             | %          | 25,773                                               |       | 3.6                                                                | %          |
| Marketable  securities—fixed rate                  |       | 75,975                                            |       | 4.6                                                             | %          | 77,643                                               |       | 4.1                                                                | %          |
|                                                    |       |                                              |       |                                                            |       |                                                 |       |                                                               |       |
| Total cash, cash  equivalents and marketable securities |       | $                                                 | 100,152    |                                                            | 4.6        | %                                                    | $          | 103,416                                                            |       | 4.0 | % |

 

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**Foreign Currency Exchange**

 

We transact business primarily in United Statesdollars. We are subject, however, to adverse movements in foreign currencyexchange rates in those countries where we conduct business. To date, theeffect of fluctuations in foreign currency exchange rates on expenses has notbeen material. Operating expenses incurred by our subsidiary in India are denominatedin Indian rupees. This subsidiary was formed in November 1999 primarily toperform research and development and customer support services. Operatingexpenses incurred by our subsidiary in the United Kingdom are denominated inBritish pounds and euros. This subsidiary was acquired as part of the Vidusacquisition and performs research and development, sales and marketing, andcustomer service activities. Operating expenses incurred in British pounds andIndian rupees exceed revenues generated in these currencies, which we do nothedge. A ten percent increase in the average exchange rates of these currencieswould decrease our operating income by approximately 5.6 percent.

 

We hold fixed-price agreements denominated in UnitedStates dollars with certain of our foreign-based suppliers: OrientSemiconductor Electronics, in Taiwan, which manufactures the Internet LocationManager; Siemens AG, in Germany, which provides the modem for some versions ofthe *i*LM; Taiwan SemiconductorManufacturing Company, in Taiwan, which manufactures our GPS digital receiverchips; and Micronet, in Israel, which supplies our *i*DT. Should there be a sustained increase in averageexchange rates for the local currency in any of the foregoing countries, oursuppliers may request increased pricing on any new agreements. If this were tooccur for all of these currencies and with each of these suppliers, a tenpercent increase in average exchange rates could increase our product costs byapproximately 2.7 percent.

 

We do not use derivative financial instruments forspeculative trading purposes, nor do we currently hedge any foreign currencyexposure to offset the effects of changes in foreign exchange rates. Similarly,we do not use financial instruments to hedge operating expenses of oursubsidiaries in India or the United Kingdom.

 

**Equity Price Risk**

 

The Series B-1 and B-2 redeemable preferred stock,issued in connection with the Vidus acquisition, included an embeddedderivative instrument, the “top-up amount”, which is indexed to our commonstock. The top-up amount is payable upon the redemption of preferred stockafter September 25, 2006 and is calculated as follows: $54.2 million less thegreater of (i) $38.0 million or (ii) 5.6 million, multiplied by the highestaverage closing sale price of our common stock for any ten consecutive tradingday period from September 25, 2005 to September 25, 2006 plus $15.0 million.

 

The fair value of thisderivative instrument was estimated at $4.1 million at March 31, 2006 and at$2.9 million at December 31, 2005. The change in the fair value of $(1.2)million was recorded in total other income, net in the consolidated statementof operations for the three months ended March 31, 2006.

 

Based on the highest tenconsecutive trading days average closing price of the Company’s common stock of$5.44 per share through March 31, 2006, the aggregate top-up, as if determinedon March 31, 2006, is $8.7 million. The top-up amount will further decrease if,and to the extent that, the average closing price of our common stock for anyten consecutive trading day period ending on or before September 25, 2006 isgreater than $5.44 per share.

 

**Item 4.Controls and Procedures.**

 

As of March 31,2006, we carried out an evaluation, under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, of the effectiveness of our disclosure controls andprocedures as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934 as amended (“Exchange Act”). As part of our evaluation, weconsidered factors such as whether data, if any, concerning significant changesto our business, new agreements entered into during the quarter, changes inrelationships with suppliers and customers, new resource commitments,litigation matters, the material weaknesses described below and changes inaccounting interpretations were disclosed in connection with the disclosurecommittee’s investigation of such matters. In addition, we considered thecomments, if any, of process owners regarding their awareness of any mattersthat could give rise to additional disclosure.

 

Based upon thatevaluation, as of March 31, 2006, our principal executive officer andprincipal financial officer concluded that, as a result of the materialweaknesses in our internal control over financial reporting that have not beenfully remediated, as described below, our disclosure controls and procedureswere not effective in recording, processing, summarizing and reporting, on atimely basis, information required to be disclosed by us in the reports that wefile or submit under the Exchange Act, and were not effective in ensuring thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is accumulated and communicated to our management,including our principal executive officer and principal financial officer, orpersons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

A disclosure controlsystem, no matter how well conceived and implemented, can provide onlyreasonable assurance that the objectives of such control system are satisfied.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues, if any, withinthe company have been detected. The Company did design into its processsafeguards to reduce, though not eliminate, this risk.

 

We previously describedtwo material weaknesses in our internal control over financial reporting (assuch phrase is defined in Rule 13a-15(f) under the Exchange Act) inItem 9A, Controls and Procedures, of our Annual Report on Form 10-K forthe fiscal year ended December 31, 2005. Public Company AccountingOversight Board Auditing Standard No. 2 describes a material weakness as asignificant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected.

 

In Item 9A, Controls andProcedures, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005, we described the remediation plan that we commencedimplementing prior to December 31, 2005 to help address the previouslyreported material weakness relating to non-recurring transactions. As of December 31,2005, we had not fully remediated the material weakness related to theaccounting for non-recurring transactions. During the second quarter of 2005,we commenced implementation of a remediation plan to supplement our existingprocesses to (a) identify internally such transactions occurring during areporting period and (b) assess the accounting treatment to be used inconnection with those transactions. These supplemental elements include (i) additionalinternal reviews of the underlying transactions and related accountingconclusions and (ii) the use of external consulting expertise to provideadditional advice relating to our accounting interpretations. The phrase “externalconsulting expertise” means that the Company would engage the services of anindependent registered public accounting firm or third party with appropriateaccounting knowledge and expertise.

 

In addition, as part ofour fourth quarter 2005 closing process and assessment of internal control overfinancial reporting, an internal control deficiency was identified thatconstituted a material weakness. Specifically, we did not accurately calculate,or perform a timely review of, the annual tax provision for 2005. This deficiencyin operation of internal control over financial reporting did not affect anyprior periods and the resulting adjustments were identified and made to theannual financial statements as of December 31, 2005.

 

       Duringthe fourth quarter of 2005 we supplemented our existing processes relating totax transactions to include the use of external tax consulting expertise toprovide additional quality assurance. Subsequent to December 31, 2005 andas a result of the material weakness identified above, we developed aremediation plan to increase the level of review and discussion of significanttax matters and supporting documentation with senior finance management.

 

 

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During the quarter ended March 31,2006, we implemented the following changes to help address the previouslyreported material weaknesses:

 

•                  Wereviewed with senior management and the Audit Committee of the Board ofDirectors the issues which led to the material weaknesses;

 

•                  Wereviewed with the Audit Committee of the Board of Directors all accountingpolicies adopted or changed and significant management estimates;

 

•                  Weincreased our internal resources by adding two additional certified publicaccountants to our finance staff; and

 

•                  Weengaged external consulting expertise to assist management with its valuationand initial adoption of SFAS 123R.

 

During the quarter ended March 31,2006, we accomplished a limited number of the measures set forth in ourremediation plans. However, no change in our internal control over financialreporting occurred during the quarter ended March 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

Following March 31,2006 and prior to the filing of this Quarterly Report on Form 10-Q, weimplemented policies and procedures for the determination, review anddocumentation of income tax provision calculations and related disclosures toaddress our previously reported material weakness.

 

The remedial measuresimplemented by us to date will not in and of themselves remediate the materialweaknesses, and certain of these remedial measures will require some time to befully implemented or to take full effect. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues, including instances of fraud, if any, havebeen detected. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detectedand could be material and require a restatement of our financial statements.Over time, the controls and procedures we have implemented may becomeinadequate because of changes in conditions, or the degree of compliance withpolicies or procedures may deteriorate. The actual efficacy of theseinitiatives and of our controls and procedures is subject to review by ourmanagement, supported by confirmation and testing by our management.

 

If the remedial measuresdescribed above are insufficient to address the two identified materialweaknesses, our financial statements may contain material misstatements.Among other things, any unremediated material weakness could result in materialpost-closing adjustments in future financial statements.

 

In light of the materialweaknesses described above, we performed additional analysis and otherpost-closing procedures to ensure that the condensed consolidated financialstatements were prepared in accordance with accounting principles generallyaccepted in the United States of America. Accordingly, management believes thatthe financial statements included in this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

 

The certifications of ourprincipal executive officer and principal financial officer required inaccordance with Section 302 of the Sarbanes-Oxley Act are attached asexhibits to this Form 10-Q. The disclosures set forth in this Item 4contain information concerning the evaluation of our disclosure controls andprocedures, and changes in internal control over financial reporting, referredto in the certifications. This Item 4 should be read in conjunction with theofficer certifications for a more complete understanding of the topicspresented.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

From time to time, we are subject to claims in legalproceedings arising in the normal course of our business. Based on ourevaluation of these matters, we believe that these matters will not have amaterial adverse effect on our operations or financial position.

 

**Item 1A. Risk Factors.**

 

Exceptas set forth below, during the three months ended March 31, 2006, there were nomaterial changes to the descriptions of the risk factors associated with ourbusiness previously disclosed in Item 1A of Part I of our Annual Report onForm 10-K filed with the SEC on March 22, 2006 which is incorporated herein byreference.

 

**A substantial portion of our revenue isattributable to a small number of customers, the loss of any one of which wouldharm our financial results.**

 

In the first quarter of2006, four of our customers represented, in the aggregate, approximately 31% ofour total revenues. Approximately 15% of our total revenues for the firstquarter of 2006 were attributable to one customer, AT&T Inc. The loss of asignificant volume of business from any of these customers could be expected toresult in a material decrease in our total revenue and could negatively impactour financial results.

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds.**

 

None.

 

**Item 3. Defaults Upon Senior Securities.**

 

None.

 

**Item4. Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item5. Other Information.**

 

None.

 

**Item 6.Exhibits.**

 
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification |
|--------|--------|---------------------------------------------|
|   |   |                                        |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification |
|   |   |                                        |
| 32.1   |   | Section 1350 Certification             |
|   |   |                                        |
| 32.2   |   | Section 1350 Certification             |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **@ROAD,  INC.**                               |
|--------|------------------------------------------------|
|   |                                           |
|   | By:                                            | /s/ Michael Martini |   |
|   |                                           |
|   | Michael Martini                                |
|   | Chief Financial Officer                        |
|   | (Principal Financial  and Accounting  Officer) |
|   |                                           |
|   | Date: May 9, 2006                              |

 

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***Exhibit Index***

 

**Exhibits**

 
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|--------|--------|----------------------------------------------|
|   |   |                                         |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification. |
|   |   |                                         |
| 32.1   |   | Section 1350 Certification.             |
|   |   |                                         |
| 32.2   |   | Section 1350 Certification.             |

 

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